Five questions on: Interest rates

 

Don't tell me, they're going up now?

Not yet, but probably sooner than expected. The Governor of the Bank of England, Mark Carney, was forced this week to revise his plans after the economy's recovery sped up.

What has changed?

Unemployment has improved. Last summer Mr Carney said that interest rates would not rise until the jobless rate dropped below 7 per cent – something he did not expect to happen until 2016.

However, the unemployment rate has fallen much more quickly, as the economic recovery has gathered pace, and the Bank forecast this week that the 7 per cent threshold would be breached in the first quarter of this year.

Cripes. So we will have an interest rate rise pretty soon?

Not that soon. Mr Carney has, in light of the new figures, wisely changed his plan. He unveiled what he called a "new phase" of guidance, saying he could afford to keep rates on hold because there was still slack in the economy that needed to be used up.

Was he just trying to cover up his cock-up?

Some experts pushed him to admit that he had underestimated the pace of economic recovery, but he claimed his so-called "forward guidance" is working and that interest rates are right to remain low.

So when will they go up?

Some experts are predicting that it will be around the time of the next election, in May 2015. Mr Carney refused to endorse that, but the Bank didn't go out of its way to say that the date was incorrect. Mr Carney said that when rates do go up, they will do so only "gradually". The market expects rates to rise gradually from May 2015 to reach 2 per cent by 2017. This is important to borrowers as a rate rise of just 0.5 per cent could see the average mortgage bill increase by £750 per year.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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