Brexit uncertainty keeps interest rates as they are

The Bank of England has made no secret of the fact it wants to gradually raise base rate. Yet, in June the Bank of England’s Monetary Policy Committee voted to keep UK interest rates at 0.75%. This has mainly been put down to the economy continuing to face significant headwinds associated with Brexit.

Base rate has been stuck at this level since it was raised from 0.5% per cent in early August 2018. And many experts think hikes are unlikely as long as Brexit remains unresolved and the UK economy lingers in its current state.

A decade of low rates

The low interest rates came into place just over a decade ago after the crushing blow of 2008’s financial crisis. To try and cushion the economy, base rate was slashed in order to cut the cost of borrowing for millions of businesses and mortgage consumers. This was done with the hope it would free up cash for consumers to spend on the economy.

These measures were initially taken to ensure the financial system kept functioning. But it also marked a radical change from the traditional banking model. The reduced interest rates were intended to be taken as a short-term measure. Something to keep as many businesses afloat as possible.

However, the last 10 years has seen only low interest rates. The average rate paid by all providers to savers with instant-access accounts swing between 0.35% and 1.14%. As a comparison, in September 2008 the average instant-access account paid 2.46%, today it would pay just 0.44%.

Are interest rates likely to stay low?

Ongoing uncertainty over how Brexit will pan out means it's likely the Bank of England will wait until changing anything in the economy.

Additionally there’s the trade conflict between US and China. With this continually developing, a rate hike would likely push up the pound making UK exports less competitive at an already difficult time.

Finally, recent data from the UK economy has suggested momentum may be slowing. Once again, some of this in down to Brexit-related effects on financial markets and businesses.

In quarter one GDP grew by 0.5% – this was mainly due to companies in the United Kingdom and the European Union buying extra stocks ahead of the previous Brexit deadline of March 2019. This was in contemplation of a hard Brexit occurring, which would cause firms to need the extra stocks to keep businesses afloat.

With the deadline now moved to October 2019, the stock piling turned out to be unnecessary. As a result it is expected that quarter two GDP will be flat – after purchasing the extra stocks last quarter, there’s little need for companies to buy during the second quarter of 2019.

The next vote on interest rates is due to take place in August, but economic outlook will continue to depend significantly on the nature and timing of the EU withdrawal – including how smooth the transition as a whole will be. The committee have already noted there’s an increasing risk to growth in the face of greater global trade tensions and the perceived likelihood of a no-deal Brexit having risen.

At this moment in time some experts are predicting low interest rates to be here for many years to come. This means that while your savings account is useful for short-term saving, opting to keep your money invested for a long-period of time could produce stronger returns. Although with investing you should understand your capital is placed at risk and you may get back less than you invested.


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