Thursday, May 13, 2010

UK: Interest rates raise, a feared and expected forecast

14 months in a row without a single change on the 0'50% British interest rates, how much UK Economy will resist?

At May, the interest rate was unchanged for 14 months in a row, as today 12 May, the Bank of England confirmed it. That means UK kept their target of an interest rates below 2%. Experts don't expect that this norm will break in less than one year, as minimum.

Reuters 'probed' economists about their opinions about the future of the UK economy:

Click to enlarge. Source: Reuters

As we can see, the interest rates will keep below 2% until later Q4, on 2011. Forecasts also expect the start of the change of interest rates will start at Q3, 2010.

Ok, we know now that Bank Of England wouldn't start to increase interest rates until Q3 2010, but why is so important that interest rates keep as low as possible?

  • Importance of low Interest Rates
Low Interest rates is a sign of a healthy economy: Borrowing is cheap, so companies can spend more, as well as consumers. On the other hand, high interest rates slow economic growth, as borrowing turns more expensive, so companies and consumers spend less, as high rates makes harder an profit.

Also, higher interest rates tends to stay on banks as saving, rather than invest in the stock markets.

Same goes for government bonds: A higher interest rate means more to pay yearly, less attractive to the investors.

Therefore, higher rates are sign of bad news in the short term. Keep them as low as possible, makes investors eager to spend, increasing the economic growth.


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