Consumers want interest rate increases
Increasing numbers of people want to see the Bank of England put up the interest rate, amid dismal returns on savings.
According to the results from the Bank of England/GfK NOP inflation survey, 21% of people think a base rate increase would be best for the economy, compared with just 8% who wanted to see a rate hike in the last survey in November. Although 17% of respondents would prefer base rate to fall further, this is down significantly from the 46% of people recorded in November.
Ultimately, consumers appear to want the Bank of England interest rate to stay were it is, with 32% calling for a rate freeze.
On a personal level, 30% of people say they would benefit from higher rates - the highest proportion since the survey began in November 1999.
The survey also reveals that British consumers' perceive inflation – or the cost of living – to be higher than it currently is.
The Consumer Prices Index – the official measure of inflation – is currently 3%, down from a peak of 5.2% in September. However, it is still a full percentage point above the government’s 2% target.
According to the results from the Bank of England inflation survey, Britons think the current rate of inflation is 4.2%.
When quizzed on what will happen to inflation this year, consumers predict it will fall to 2.1%.
Vicky Redwood, UK economist at Capital Economics, says people’s inflation expectations are “too low for comfort”.
Capital Economics believes that the UK will enter a period of deflation – where prices actually fall – at some point this year. There are concerns that, if people expect prices to keep on falling, they will put off spending. This could cause deflation to become entrenched in the economy, a dangerous situation that would cause the recession to turn into a depression.
“The bigger danger is that inflation expectations remain low, helping to perpetuate a vicious deflationary spiral,” Redwood adds.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.