Morning Line: interest rate rise or not, savers are unlikely to benefit

Almost all of us are anxious about where interest rates are going.  There are 11 million homebuyers who are hoping that rates will stay at their all time low of 0.5% to keep monthly mortgage repayments affordable.   Many are paying just 2.5% for their mortgage money on their lender’s Standard Variable Rate and they do not want to see that go up.  Meanwhile millions of savers with money on deposit are very unhappy that the best rate they can get is less than 5% and with the Retail Prices Index at 5% also it leaves them suffering a loss in real terms. 

So where are interest rates going and will savers, who outnumber borrowers by around five to one, see a better return on their money if rates do rise?  They have had a very raw deal now for a couple of years. 

Seldom have economists been so evenly split with around 50% believing that interest rates will go up sooner rather than later to choke off persistent inflation  and the other 50% convinced we face a double dip recession and that interest rates will remain low for some time to come.

Guarding against austerity cuts 

In the deflation camp sits the Ernst & Young ITEM Club which predicts that the Bank of England won’t be able to raise interest rates for at least three years to counterbalance the government's austerity cuts which will depress growth.   Peter Spencer, ITEM's chief economic adviser, warned that the Bank may even have to restart its £200 billion quantitative easing programme – otherwise known as printing money – to head off a double dip recession.

In the other camp are those who believe the Bank of England will find it hard to keep interest rates at their current level and needs to increase rates sooner rather than later.  With a rise in VAT to 20% in January of next year, inflation is built into the economy and is in danger of becoming entrenched.  It has been above target for 41 of the past 50 months.

Robust economy? 

The official forecasts predict interest rates will start to rise next year, reaching 3% by 2014.  Meanwhile pressure for an early increase in rates is mounting as official GDP figures showed that the economy grew at 1.1% in the three months to June, almost double forecasts and four times the pace of growth in the first quarter.  One member of the Bank of England Monetary Policy Committee, Andrew Sentance, has already called for a rise in Bank Base Rate and last week’s GDP figures could persuade others that a rise sooner rather than later is necessary. 

‘The strong growth registered in Q2 suggests that further policy loosening may be unnecessary, and may help to swing the debate in favour of those arguing that the economy is sufficiently robust to withstand some modest policy tightening,’ said Simon Hayes, economist at Barclays Capital.

Dubious rebound