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Interest rates held at record low of 0.5%

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Written by: Paloma Kubiak
14/01/2016
Interest rates have been held at 0.5% - a record low for a near seven years - the Bank of England announced today.

The Bank of England’s Monetary Policy Committee today voted 8-1 in favour of maintaining the 0.5% base rate, which means interest rates are unchanged for the 82nd consecutive month.

However all members agreed that, given the likely persistence of the headwinds weighing on the economy, when the bank rate does begin to rise, it is expected to do so “gradually” and to a level “lower than in recent cycles”.

Following the announcement, a number of commentators gave their instant reactions:

Dovish stance throughout 2016

Nick Dixon, investment director at Aegon UK, said: “A slowing economy and nervous stock market will have kicked the prospect of any major rate rise into late 2016 at the earliest. Falling oil prices and no inflation across the UK economy are giving the MPC good reason to keep rates low in order to steady the ship. With the inflation target looking ever distant, we expect the MPC to remain dovish throughout 2016, with households continuing to benefit from favourable credit conditions.”

Maike Currie, investment director for personal investing at Fidelity International, said: “Many investors have questioned how quickly the Bank of England will follow the Fed’s lead in making the first move upwards on rates. While there is no formal link between US and UK interest rates, historically these have tended to move in tandem with typically a six-to-nine month lag.

“We are quickly hurtling towards the seven-year anniversary of UK interest rates staying at record lows (March 2016). On the basis of the Bank’s own projections, there may only be two quarter point hikes in 2017, which means interest rates could be just 1% a decade after the start of the financial crisis.

Equity income as a safe haven

Currie continued: “In a low interest-rate environment, investors are likely to continue to view equity income as a safe haven and a rare source of yield. Fidelity’s calculations show that if a saver had invested £15,000 into the FTSE All-Share index over the 10 year period from November 2005 to November 2015, they would now be left with £27,128.25. If, however, they had invested £15,000 into the average UK savings account over the same period, they would be left with £16,116.71.  That’s a difference of £11,011.54 – too big for anyone to ignore.”

Mortgage holders should remortgage now

Jeremy Duncombe, director, Legal & General mortgage club, said: “Borrowers will likely greet today’s decision by the Bank of England with apathy, but must not believe this low interest rate environment will last forever.

“Earlier this month, George Osborne warned mortgage holders must be prepared for a UK interest rise in 2016, following the hike in US rates last month. Although such a rise was unlikely in January, it’s crucial that borrowers on an SVR or those at the end of their current agreement look to secure a more beneficial rate by remortgaging now, before lenders price-in the inevitable rise.

“There is a generation of borrowers that now exist who are yet to experience the impact of a rate rise, and in the New Year it is important they understand how such an increase could affect their monthly finances. By speaking to their broker sooner rather than later, they could potentially save themselves a substantial amount in monthly interest, the equivalent of a pay rise.”

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