The Bank of England (BoE) has decided to keep interest rates at a record low 0.25%. The Monetary Policy Committee, which sets the rate, followed the governor’s reasoning that sluggish growth and Brexit uncertainties wouldn’t be cured by a rise.
Interest rates are used to manage economic growth, price stability and employment. Lowering the rate makes it easier to borrow money which encourages firms to spend, trade and hire more workers. On the other hand, rates could be raised where the economy is overheating, inflation needs to be reduced or the unemployment rate drops significantly.
Setting this rate is a delicate process: making the rate too low can result in debt ballooning and inflation (the rate at which prices rise) getting too high. With a high inflation rate comes rapid price rises and the devaluation of a country’s currency. On the other hand, higher interest rates can create deflation (just look at Japan) and reduce growth.
However, this hasn’t stopped dissent in the ranks. There’s growing support for a rate rise.
Take the deputy Governor of the BoE. He believes that the UK economy can handle it. He cites relatively low unemployment and the economic apocalypse that didn’t arise upon the vote to leave. He also voiced concern over the worrying cocktail of stunted wage growth and high inflation, squeezing consumers’ living standards.
What we do know is this: when a rise does occur, it will be gentle, small, and with plenty of warning.