Darren Scott-Guinness: Keeping doctors and dentists informed with the latest economic and investment news
Figures show that the UK economy is stabilising and the last of the recession is behind us. So if everything is now in working order and the market is growing at a steady pace, why is a potential rise in the rate of interest necessary? It’s something that is puzzling Britons and Americans alike as they await the likelihood of the first interest rate rise in the last decade.
How low inflation can have an adverse economic effect
Inflation currently sits around zero percent, according to the official consumer price index (CPI) figure for June 2015. May’s figures showed a marginal rise to 0.1%, up from a period of deflation in April 2015.
Unemployment in the UK is also the lowest it has been in many years and consumer spending continues to drive funds back into businesses and the economy as a whole, as the wheels keep turning.
However, if growth continues, there is a risk that demand will eventually exceed productivity, which is likely to have a knock on effect with the cost of living as suppliers rise the price of their goods to slow down demand and maximise their return. This can incidentally result in a situation where people may end up paying more than for goods and services than what they are actually worth, which is adverse to the current, more favourable conditions.
Economists are predicting that inflation will start to rise after September, however it is viewed as unlikely to hit the BoE target of 2%, according to the Financial Times (FT).
The anticipated rate rise
Recent communications from Bank of England (BoE) and the Federal Reserve (Fed) suggest that even though inflation is close to zero, a rate rise is still on the horizon.
Mark Carney, governor of the BoE, suggests that above-normal levels of economic growth, rising wages and rising costs are reason for action, although, there was no indication as to the timescale.
The cost of borrowing is expected to rise at a gradual rate though over the suspected three year policy with the Monetary Policy Committee (MPC). Rates are anticipated to remain substantially less than the previous norms of 5 % with Mr Carney adding that “timing is important as some borrowers have only ever experienced interest rates close to zero“.
How the pending rate rise is affecting investment
Following these comments by the BoE, prices of UK government bonds fell, however the sterling rose against the dollar and the euro.
Investors are preparing portfolios for a potential increase as the yields on gilts have been rising since a low point in March earlier this year.
Many property investors are also preparing for a potential increase by fixing their mortgage rates in advance, to secure a low rate.
Working with a financial adviser to discuss the effects of inflation on your financial decisions will help ensure you make wise choices with investments and borrowings.