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Mixed Outlook

The March rate setting meeting by the Monetary Policy Committee (MPC) saw interest rates once again held unchanged, however there is a growing feeling from economists that this trend will not continue through the rest of this year.

Forecasts for the economy are mixed, with some areas having seen good performance during the first quarter, like the housing market for example, while others are seeing a downturn in economic performance and are showing no signs of an immediate recovery.

The base rate of interest has remained unchanged now for eight months, and before that it was stuck at 4.75% for a full year, and it was a split decision by the committee that led to the drop to the current 4.5% rate. Since that time, only one of the members has continued to call for further rate cuts, while the rest of the nine-strong team have been happy to hold off on a change and continue to closely monitor the state of the economy.

Predicting what the future holds for interest rates is very difficult at the moment, as very influential parts of the economy are experiencing different fortunes. As mentioned above, the UK housing market is seeing something of a resurgence of late, with the upturn in sales that started in December showing no sign of faltering so far this year, and with sales on the increase prices are also becoming stronger.

A strengthening housing market doesn’t necessitate a cut in interest rates, in fact a reduction could actually cause more people to enter the market and push prices upwards, causing something of a boom in prices, which would not be desirable.

Converse to this somewhat buoyant sector, the retail sector is still struggling with high-street retailers seeing retail sales decline 1.3 percent from December, the biggest drop in 13 months. The annual rate of growth in sales slowed to just 1.3 percent from 4.3 percent in the previous month, as household goods sales fell 3 percent in the month. Amid this low level of consumer spending, retailers are calling on the MPC to cut rates and so stimulate activity in the sector.

A cut in interest rates would be welcomed by retailers, however as discussed above, the housing market may be adversely affected by this.

Growing consumer debt is also a concern for the Bank, with more and more people slipping further behind with their credit card repayments, and a worrying increase in the number of people declaring themselves bankrupt. Lowering interest rates would be a bit of a double-edged sword in this area, as it would lessen the burden on those in debt, but could also encourage more people to borrow and so find themselves in financial trouble.

As you can see, deciding on what should be done with interest rates is a tough task, in the near-term it is widely believed that rates will stay unchanged, however most experts in the area feel that a quarter-percent cut will come before the year is out.