Five years of rock-bottom rates for the UK – an unhappy anniversary

March 6, 2014

Britain’s economy has now been wedded a record low 0.5 percent interest rate for five years.

Traditionally, a fifth anniversary demands a wooden present – perhaps a spoon in Britain’s case. The economy is still smaller than its pre-recession peak (1.4 percent at the last reading), unlike almost all of its major developed economic peers.

When the Bank of England first cut interest rates to 0.5 percent in March 2009, Britain had just reached the nadir of its worst recession in living memory.

Reuters polled around 60 economists right after the March 2009 meeting, and here’s what they had to say on the outlook for rates:

  • Rates would stay at 0.5 percent until the end of 2010, when the economy would be sufficiently strong enough to raise them back to 1.0 percent.
  • A handful of respondents thought rates would return to around 2 percent or more by then, while others thought a cut below 0.5 percent was more likely.
  • 37 out 51 economists thought plans to spend 150 billion pounds through the BoE’s asset purchase programme were “about right”. Ten said that wouldn’t be enough, and four said that was too much. In the end, the BoE printed 375 billion pounds ($630 billion).
  • Around the same time, economists thought the economy would shrink around 2.9 percent in 2009. In fact it was much worse – a 5.2 percent nosedive.

As for now, there is a firm consensus that interest rates will rise in the second quarter of 2015, although it remains to be seen whether Britain’s recent economic resurgence can last into the coming years. The record low Bank rate has certainly boosted the housing market, at least. Data from mortgage lender Halifax showed on Thursday house prices rose 2.4 percent in February alone, the fastest monthly pace of house price growth since 2009.

Still, if the recovery doesn’t spread further into areas like business investment and exports, this might not be the last unhappy anniversary for rock-bottom interest rates.

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