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What Is The Outlook For Interest Rates In The 2020s?

Peter Hemple looks at the inflationary expectations for the UK and global economies

At the end of January, the Bank of England (BoE) held interest rates at 0.75% amid early signs of a pick-up in the UK and global economies. In Mark Carney's final interest rate meeting as governor of the BoE, the Bank's Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged. Recent weak economic data had led to speculation that rates could be cut, but Mr Carney said “the most recent signs are that global growth has stabilised”.

But the MPC said it was poised to cut interest rates if necessary later this year. Fewer companies in the UK are now worried about Brexit Carney told a news conference following the rate decision. He said that survey data suggested UK growth will improve, but added: “To be clear these are still early days and it's less of a case of so far so good than so far good enough. Although the global economy looks to be recovering, caution is warranted. Evidence of a pick-up in growth is not yet widespread.”

The nine MPC members have been split on rates since November 2019. Lower interest rates are good news for borrowers and bad news for savers because High Street banks use the Bank of England base rate as a reference point for many mortgages and savings accounts. It is also bad news for Sterling, which ultimately adds to inflationary concerns later on as exports start to cost more. The two members that had voted for a base rate cut continued to call for an immediate interest rate cut to 0.5%.

The Bank's latest economic estimates suggest that the UK economy did not grow at all in the final three months of last year. Weaker growth at the start of this year is also expected to drag overall economic growth down to just 0.75% in 2020. This is down from a projection of 1.25% last November. The UK economy is expected to expand by 0.2% in the first three months of this year, which means that growth is expected to slow further, later this year.

Coronavirus concerns
However, these assessments by the BoE were made while giving little consideration to the growing coronavirus, which at the time of writing had infected more than 32,000 people globally, up from around 500 a fortnight earlier. Regarding the coronavirus outbreak, Carney noted that it was a “reminder of the need to be vigilant” when it comes to bumps in economic growth around the world. 

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