The Bank of England unanimously (9-0) voted to increase interest rates by 0.25% from 0.5 to 0.75%.
Bear in mind that the historic long-term average for interest rates is 5%, we are still in very low rate territory.
There are a number of drivers to this. Let’s start with minimising our National Debt interest, and keeping inflation under control. Those of us who remember the 1970’s will remember the effects of out of control inflation. At one point mortgage rates hit 18%. Your current monthly payment, based on 4%, would more than quadruple. So it is important to keep inflation under control.
Another consideration is the state of the economy. Interest rates increases imply the economy is performing well and sustainably. Too large an increase in interest rates has the effect of slowing the economy and hence reducing tax revenues.
Another thought that may well have been in their minds is that just as increasing interest rates reins in the economy because it increases the cost of doing business, reducing rates stimulates the economy. At some point, there will be another recession, and unless we have headroom in the interest rates to make a reduction we will be unable to stimulate the economy when the time comes.
It is also worth remembering that Quantitative easing, which is basically printing money, without the assets to support the value, is a highly inflationary activity. So if inflation does take off, it could well be spectacular.
All of the above drives the very real and urgent need to improve our balance of payments with the rest of the world. That is Europe and the rest of the world. The sooner our Government stops its dithering (Which is truly appalling) the sooner business can get on with it. Please remember that 85% of our business takes place outside of the EU, and increasingly the Global economy needs our input.
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