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Thursday, 25 February 2016

Member Blog: Why are record-low interest rates still here?

The end of record-low interest rates is becoming a bit like TV series, Walking Dead, in the way that every time that we think it’s coming to an end, something happens to keep it going.
Lisa Berrido of Mortgage Advice Bureau explains:

After spending most of last year claiming that the Bank of England is preparing for a rate rise in the early months of 2016, experts are now saying that rates will continue to remain low well into 2017.

Every month, nine members of the Monetary Policy Committee (MPC) meet up and vote on whether to increase the Rate, and this month they voted 9-0 to keep it at its record-low of 0.5%.

Why the sudden change in opinion?

There are numerous factors but one of the main ones is the current price of oil as, following last year’s trends, it has continued to slump, meaning that it is costing you less to do things like heat homes, drive cars or buy goods, and all of this means that inflation sits at just 0.2%, way below the government’s, admittedly loose target, of 2%.

And there lies the reason for the opinion shift - inflation.

Why does inflation affect interest rates?

It’s a simple cause and effect relationship.

The government classes 2% as a healthy target – low enough to encourage spending but high enough for businesses to continue to make money. Sounds like a happy medium, right?

However, last year, we fell into minus figures (-0.1%) for the first time in 55 years, and to try and boost inflation, economists predicted that the government would increase rates to encourage consumer spending.

Why would increasing rates encourage me to spend money?

We fell into minus figures, known as deflation, because people were spending less. Think of this analogy: you go to your local superstore to see that a new TV is £300 and realise that it was £350 the month before. Because of this, you decide to leave the TV, in anticipation that it will go down again next month.

Now apply this to a wider scale in terms of weekly shopping across the country and you’ll see how people not spending could cause problems for the economy.

To rectify this, increasing rates encourages buyers to buy because they want to get their goods before they get too expensive.

So why didn’t they just put the rates up?

There was a huge chain reaction. The price of gold in China plummeted and their stock markets suffered a sudden blip in the ‘Black Monday’ incident, oil prices suddenly slumped in Russia and the Eurozone was extremely delicate due to the ongoing Euro debt crisis.

The global economy suddenly became extremely fragile overnight and increasing interest rates in such a hostile environment would have been a very risky move – and still is to this day.

What does this all mean for my mortgage?

For the time being, mortgage rates will continue to remain at their record lows, and if you are considering remortgaging or getting a mortgage, now could be the time to do it before the economy outlook changes again.

However, if there’s anything that this story shows it’s that, unlike Walking Dead, the economy is extremely unpredictable so contacting a professional mortgage adviser to guide you through your next steps is extremely important.

Lisa Berrido is Business Principal from Mortgage Advice Bureau – for further information please call: 01942 526228, email: or visit: