Bank of England maintains low interest rates in run up to referendum
The Bank of England announced on Thursday (16 June) that it would keep interest rates at their current record low of 0.5%. The Monetary Policy Committee repeated its warnings about the potential adverse effects on the economy of a Brexit.
Commenting the announcement, Ian Kernohan, economist at Royal London Asset Management, says: “There was zero chance that the Bank of England would change policy today, but it will be interesting to see how they respond to the result of next week's EU referendum.” He adds that inflation remains well below target.
Maike Currie, investment director for personal investing at Fidelity International, says: “The nation gearing up for the vote next week is a short-lived uncertainty, but there are more persistent economic factors causing a drag on growth.
“Weak inflation, a slowing economy and low wage growth presents a cocktail of concerns which has no doubt contributed to this decision.”
Raw deal for consumers
Calum Bennie, savings expert at Scottish Friendly, says: “The current uncertainty caused by the looming referendum has triggered sterling to be increasingly volatile and interest rates look like staying at rock-bottom for months, if not years.
“Unless the result of the referendum, whatever it may be, gives a boost to the markets, consumers face a raw deal this summer. Not only will their cash savings remain in the doldrums, but their spending power, particularly abroad, could be hit.”
The Bank of England's announcement follows last night's Fed announcement to keep US rates unchanged. The next question, says Currie, is: if not June, then when?
New York Fed member William Dudley suggested recently that a July hike was a possibility, but Currie suggests Fed chair Janet Yellen will only move when she has the opportunity to make her reasoning absolutely clear. “September seems like a much more likely option,” Currie says.
This article was originally written for our sister publication, Money Observer.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
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).
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.