AN INTEREST rate hike before the end of the year is unnecessary and should be avoided, a high-profile forecasting body has warned.
In its Autumn Forecast, the EY Item Club noted that the Bank of England’s Monetary Policy Committee (MPC) has become “markedly more hawkish”, with a base rate rise looking increasingly likely before the end of the year, particularly given the rate at which inflation has increased in recent months.
However, the forecasting body said it was “far from convinced this was the right course of action”, suggesting that inflation is likely to fall back during 2018 anyway, as the impact of the drop in the value of sterling following the Brexit vote fades, adding “domestic price pressures are likely limited by ongoing lacklustre growth and only a gradual pickup in earnings growth”.
Instead, the Bank of England should look to raise interest rates once the economy is in a stronger state, the research argues. According to EY Item Club’s forecasts, the economy will only grow by 1.5 per cent this year, dropping to 1.4 per cent next year.
Several senior figures from the Bank of England have hinted that an interest rate rise is on the way in the next few months.
For example, Mark Carney, the governor of the Bank of England, has said that a rise will take place in the “relatively near term”, while MPC member Gertjan Vlieghe gave a speech in September in which he concluded that “we are approaching the moment when the bank rate may need to rise”.
The central bank’s base rate has languished at a record low of 0.25 per cent since last August, having spent the previous seven years at just 0.5 per cent.
The low interest rates on offer from conventional savings products has served as a boost to the P2P market, increasing demand from investors. RateSetter for example announced that it saw new investor accounts double in the month following last year’s rate cut.
However, the low base rate has ensured that borrowing rates have also remained relatively low, leading to questions over whether P2P lenders could or even should try to compete on personal loans.
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