The Big Freeze: Interest rates may not rise until 2020

Pre-Brexit predictions relating to the Bank of England’s interest rate focused on when it would rise. However, in the wake of the United Kingdom voting narrowly to leave the European Union, the bank’s Monetary Policy Committee (MPC) voted 8 to 1 to maintain the bank rate at 0.5%, an all-time low since it came into effect in 2009. Further to this, financial analysts have predicted that it will remain at this level until 2020.

This action, or inaction, of the MPC has much to do with the uncertainty that emerged after 51.9% of voters in the UK opted to leave the European Union. However, despite this, banks and building societies have still opted to cut savings rates, as they no longer need the bank rate to change in order to cut their own rates.

The inaction of uncertainty

Azad Zangana, a senior European economist, has proposed that it is still much too early to gauge the economic impact that Brexit will have on the UK. However, he amongst others have suggested that the MPC may cut rates further in August, when they are due to release their latest growth and inflation forecasts and when they have a much better understanding of the effect of the referendum result.

Indeed, Andy Maldane, the Bank of England’s Chief Economist, has pledged to vote for a change to the rate in August in order to ‘spark life’ into the economy. Nevertheless, there has been opposition to this, notably from outgoing MPC member Martin Weale, who has advised the committee that they should wait until they have more information, as he rejected concerns that maintaining the rate at its current level would disappoint financial markets.

Drawing parallels to Japan

This debate has sparked concern from a number of analysts that the UK is in danger of entering a deflationary situation, much like that in Japan. Under the economic policies advocated by Japanese Prime Minister Shinzō Abe, otherwise known as Abenomics, the Japanese central bank adopted an interest rate of -0.1%, in an attempt to encourage banks to lend and savers and businesses to spend and invest.

However, financial markets have deemed this policy to be a failure, explaining the concerns emanating from the UK. Following the referendum, pound sterling has increased in value slightly against the dollar, but it is still 10.8% lower in value than its pre-Brexit level. This, amongst other factors, rightly shows why we must be concerned about the economic uncertainty that Brexit has brought.