Interest rates could rise early next year and at a much faster rate than previously seen, according to one economist at a City fund manager.
Simon Ward of Henderson New Star claims that the Bank of England base rate of interest, currently at an all-time low of 0.5%, will increase early next year and that the rate of increase is likely to be higher than normal, with inflation likely to increase quickly following the government’s quantitative easing strategy.
That means bad news for homeowners, as those with variable or tracker mortgages will see their mortgage repayments increase but savers should see a better return on their investments.
The Bank of England base rate has been brought down to record lows during the current recession in an effort by the bank to encourage spending and stimulate the economy. An increase in interest rates is fully expected when the UK exits recession but it is the scale of the increase that is being debated by economists.
And Mr Ward, commenting on his personal blog claimed that the risk of higher-than-expected inflation could lead to an above-average jump in interest rates next year.
“An eventual withdrawal of monetary stimulus is likely to take the form of a rise in Bank Rate rather than a reversal of quantitative easing,” wrote Ward. “Given the historically low starting level [of interest rates], rises in Bank Rate, when they begin, could be larger than in the initial stages of prior cycles.”
In simple terms, that means that the government’s decision to inject more money into the economy, known as quantitative easing, could accelerate the rate of inflation when the economy returns to positive growth. To combat this inflation, the Bank will increase interest rates, which would reduce consumer spending power and, in theory at least, reduce the inflation rate.
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