Economist predicts interest rate to rise from 0.5% to 0.75%
AN increase in Bank of England interest rates tomorrow to above 0.5% for the first time in a decade is “probable”, it has been claimed.
Dr Esmond Birnie, senior economist at the Ulster University economic policy centre, said financial markets were expecting an increase from 0.5% to 0.75%.
Tomorrow’s decision from the Monetary Policy Committee on whether to increase rates or keep them at 0.5% will come almost two years after they were cut by Governor Mark Carney to 0.25% in the aftermath of the vote to leave the EU.
But Dr Birnie added: “There can be no absolute certainty about this — the recent UK economic growth and inflation data have been mixed, sometimes individual members of the Monetary Policy Committee can change themselves from hawks to doves or vice versa at very short notice and the comments of the Bank Governor Mark Carney are often open to interpretation.
“Nevertheless, an increase from 0.5% to 0.75% is probable.”
But he said a return to a “normal” level of interest rates would be gradual — and a normal level would now mean rates of around 2-3%, instead of the level of up to 6% of the mid-2000s.
The likelihood of a return to recession — a decade after the onset for the last severe downturn — was increasing.
“We are now 10 years on from the last recession. The likelihood of another downturn is increasing,” he said.
“If the Bank had not begun to increase interest rates now, the threat is that the Bank/Monetary Policy Committee will have limited scope to cut interest rates to deal with any recession because rates were already so close to zero.”
But he said that keeping the rate at 0.5% — a level which it was increased to in November last year — could find favour in some quarters. It could suit Northern Ireland, where economic growth is sluggish.
“A MPC decision to maintain the status quo will be criticised but will also have its supporters.,” he added.
“Most economic forecasts, including those of the UU Economic Policy Centre, suggest that UK GDP growth in 2018 will be subdued. Here the available indicators suggest that whilst growth continued in 2017 it has been slowing down and the region is lagging the UK average.
“Maintaining interest rates at these very low levels for so long could store up problems for the future: when the next recession comes the Bank may be left with little firepower in the locker of monetary policy.”