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Wednesday, 7 August 2013

Interest rates to remain low

The new Governor of the Bank of England, Mark Carney, has caused quite a stir by setting out the conditions that will need to prevail in order for interest rates to rise. Speaking at the Bank’s quarterly Inflation Report he said interest rates would rise "more slowly than market assumes”.

He went on to say;

"In particular, the [interest-rate setting] MPC intends not to raise Bank rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%."

So given that the current unemployment rate is 7.8% then it is not going to be happening anytime soon. Current estimates put the time taken for the level of unemployment to reach that target at 3 years.  Of course, there are some get outs mentioned over whether rates would remain low such as; "provided this does not entail material risks to either price stability or to financial stability”.  So basically if inflation starts to go out of control then they can increase the rates.

The new benchmarking on interest rates is really a way of providing some certainty for businesses if not the markets.  However, Carney did stress that despite the recent favourable economic statistics and surveys any recovery in the UK economy was still fragile.  He pointed out that productivity was very low and there were still many people "working less than they would like"

What does this mean for the so called "Zombie Companies" only paying interest on the loans but no capital repayments?  Well they probably have more life or should we say death in them yet!



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