Why there will be so much talk about interest rates this week

July 30, 2018

Why there will be so much talk about interest rates this week…

In the coming days, there’s almost certainly going to be a lot of talk in the financial press over the Bank of England and whether they will increase interest rates on Thursday. We wrote about why interest rates - or monetary policy as you may see it called - moves shares, but the Bank of England’s meeting this week is viewed by many market commentators as being pivotal.

The Monetary Policy Committee - the Bank of England’s team that will make the decision - meet officially eight times a year, or once every six to seven weeks, to talk about interest rates.  The conclusion of this two day meeting - which starts on Wednesday - sees a number of statements released including the Bank’s inflation predictions for the next quarter. However the ‘headline grabbing’ point will be whether we see interest rates rise.

So, why’s this all so important? One key role of the Bank of England is to moderate inflation (price rises) and it can do this by varying the interest rate. As we discussed in the previous article, higher interest rates mean people save more and spend less, in turn lowering the rate of inflation. The opposite is also true - if inflation starts to fall, the Bank can cut interest rates, encouraging consumers and businesses to spend a little bit more. 

The problem is, the Bank has to try and make its move on interest rates before inflation gets too high, rather than after the event. For a whole bunch of reasons - but most notably the fact that the Pound isn’t really worth any less than it was a year ago, so imported goods cost about the same - inflation has dropped back from the highs we saw at the end of last year.

With the Bank of England base rate at 0.5%, there’s a growing degree of urgency from some to see interest rates rise. Most importantly, the Bank needs the ability to be able to cut rates in the future to stimulate the economy if we go through a slow-down. And with Brexit uncertainty on the horizon, the importance of having this flexibility is clear.

For many, whether interest rates are moved by a quarter of a percent may seem trivial, but doing so would send a signal of confidence over the UK economy - and also give the Bank of England that much needed room to manoeuvre when the next economic slowdown arrives.

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