By Claire West
The UK200Group of independent accountancy and lawyer firms has commented on the Bank of England’s decision to once again leave interest rates on hold, and what is likely to happen to rates in the future.
Jonathan Russell, vice-president of the UK200Group, said: “The concern over interest rates is the rate of inflation. Normally, inflation is a sign of increased demand but in this case it is increases in raw material and commodity prices, whilst we still have surplus capacity in the system".
“Increasing the interest rate would probably have little or no effect on inflation but could seriously damage the fragile economic recovery. Inflation will almost certainly continue to rise as commodities are increasing in price, businesses are trying to improve margins and VAT is going up in January".
“If the committee holds its nerve, inflation should drop dramatically in about 12 months without the need to increase interest rates. However, when economies return to normal in the long term, which may still be several years away, normal interest rates would probably be about two-and-a-half to three per cent.”
Colin Howe, president of UK200Group, said: “I think it probable that the base rate will remain at or around this level for at least 12 months. What is more interesting, perhaps, is how relevant this 'committee set' rate is in the real world".
“Rates offered to business borrowers usually bear no resemblance to the base rate as the margins sought by banks make the effective cost of borrowing much higher than the headline rate. The base rate does not represent the real world market rate".
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