Will interest rates stay low forever?
It has been more than seven years since interest rates hit rock-bottom, and the consensus view following last week's cut to 0.25% is that the general direction of travel has now changed to "lower forever" as opposed to "lower for longer".
Experts are predicting a further cut before the year is out. One such commentator is Azad Zangana, senior economist at Schroders, who has pencilled in a reduction to 0.1% in November.
A backdrop of anaemic growth is the main reason why rates may have to stay low. The theory is low interest rates help stimulate the economy and encourage consumers to loosen their purse strings.
According to Mr Zangana, "concerns over the UK's exit from the European Union appear to have hit household and business confidence", which in turn forced the Bank of England's hand to cut rates last week.
Slowdown in growth
"It believes that the currency effect on inflation will be short-lived, while the implications from slower growth could be more powerful over the medium term," he says.
But even the more bearish economist cannot foresee a scenario of negative interest rates hitting the UK shores, particularly when Bank of England governor Mark Carney has warned against such a move.
Experts, however, have been wrong-footed in the past when it comes to forecasting future interest rate movements, with various economists predicting an interest rate rise in 2011 that failed to materialise.
This time around, according to Martin Cholwill, manager of Royal London UK Equity Income fund, the way the market is behaving suggests that rates could remain at their lows "for a number of decades".
"Rather than make predictions I try to read the market, and when you have companies like Vodafone issuing a 30-year bond that pays just over 3%, the market is telling you that interest rates will remain at their lows for the foreseeable future.
"The way the 10-year gilt yield has moved over the past week is another sign (falling from 0.8% to 0.6%)."
Tom Stevenson, investment director for personal investing at Fidelity International, agrees that "lower for longer" is looking worryingly like "lower forever".
"It's clear that the Bank of England is once again following the financial crisis template: making liquidity readily available, easing monetary policy and looking through the risk of exchange-rate fuelled inflation. But it is also becoming clear that the Bank cannot act alone," he says.
"A combined Bank of England and government programme of monetary and fiscal stimulus will be required if Britain is to avoid recession."
This story was originally written for our sister publication, Money Observer.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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).