Low-Interest Rates to Britains Economy - Case Study Example

Introduction

Britain’s economy recovery has been very slow since the world financial market went through a recession 7 years ago. Britain is one of the countries that was hit hard by the 2007 global recession (Farlow, 2013). However, it is important to note that economies can fluctuate due various factors such as cost of living, inflation, GDP just to mention a few. The interest policy rates are usually very low in the countries whose economies are well developed. In addition, the central banks especially the Bank of England have been forced to use exceptional monetary policies; this lowers the interest rates for long-term loans. The rates have reduced significantly over the years and have affected the yields negatively on some of the Euro zone members with Britain being one of them. This document will explain and expound more on the causes and impact of low interest rated in England over the past 7 years. Additionally, this will be based on the monetarist and microeconomic theories.

Economists have predicted that the interest rates in Britain will continue to record low interest rates. According to research the British economy is known to be among the biggest in the globe and the current performance shows that it will remain the same in a couple of years to come. The effects of low interest rate have benefited many by reducing the borrowing cost, it has affected the spending, exports and saving investment, rising assets prices and low exchange rate. Britain interest rate might be increased in future depending on how other economies will perform. The first financial crisis hit England in 2008 and since then the interest rate has been staggering. In 2009 the rate was reduced to 0.5% and quantitative easing program was introduced (Krishnamurthy & Vissing-Jorgensen, 2011). This was caused by the cutting down of the borrowing cost. However, in the resent months the economy continued to strengthen and many banks are worried about the recovery stability and the repercussion it will have on inflation. It has been stated by the Bank of England that status of the economy changed from the previous year and it’s possible that inflation will rise at a slow rate and this translates to low interest rate (Allen, 2016). According to the monetarist theory it shows the role of the central bank and the effects of money supply on inflation. The central bank discourages borrowing when money supply is in excess and reduces the interest rate to encourage spending and money lending. This practice is also seen in the microeconomic economy theory on supply and demand. The lives of the people of Britain and the economy have been greatly improved after the bank of England reached a balance by successfully implementing the two theories.

As at November 2015 inflation rate was at 0.1% according to the bank of England (Karras, 2015). The decrease of the oil prices says otherwise as the inflation rate was expected to rise as the statistics forecast indicated. With the decrease of oil prices, the living standard of Britain will continue to be slow. In the same month, the bank of England affirmed that the British economy will grow in the coming months, but the economy is still slow contrary to what the banks predicted.

Due to the new changing market and the continuing drop of oil prices, Fidelity Insurance Investment director indicates that the Bank of England has been very careful and ensured that the low interest rates are maintained. The low interest does not affect the British economy market; in fact, it is favorable to the country’s economy. The interest rate is expected to rise by the end of the year as stated by the monetary policy committee. Moreover, the Bank of England will not accept an increase on the interest rate because of the global financial crisis. The growth of earnings is slow as compared to the high employment rate in Britain. This slow development has caused slow inflation growth and working hours being reduced. The Bank of England has a high chance of maintaining the same interest rate because of the slow inflation and wages growth.

According to some of the committee members of the monetary policy, they believe that the Britain economy will improve in a few months or years. After 11 years and 5-year low, the sterling pound has strengthened against the euro and US dollar respectively (Spencer, 2012). However, most investors lack trust on the British economy and they don’t think it will improve any time soon. The strength of the sterling has reduced the import price and has pushed down the inflation rate causing the reduction to prices of commodities. Economists in England have suggested that the interest rate be reduced below the current 0.5% base (Briscoe, 2005). This may seem as being impossible but the bank of England governor has some consideration and thinks it’s very possible to reduce the interest rate. Manufacturing sector has also been affected by the slow growth in England’s economy and it has affected the Gross Domestic Product. The reduction of the interests affects the growth of important economic sector unlike the interest rate being increased (Yoon, 2010). The trend of the global economies affects the Bank of England’s position on the interest rate. This can be clearly seen when customers delay on placing an order for their goods and this has brought about doubts in the world’s economy. When interest rate is low, it becomes beneficial to some but to some it becomes a problem causing major loses. The low interest rate is not favorable to the individual who intend to save but is of beneficial to individual who have mortgages and the ones with loans (Great Britain. 2004).

In the course of the past 7 years, it was found that the individuals who saved their money lost an estimate of 160 billion pounds because of the low interest rate. These statistics does not affect the policy makers of the Bank of England and the interest rest will remain the same until August 2018. According to Mr. Mark Carney, the Bank of England Governor, he stated in his speech that the banks goal is to ensure that there is stability for both economic and monetary instead of adjusting the interest rate constantly. Businesses have also been affected by the low interest rate, in spite of several schemes and all the pressure in politics for banks to make it easy for businesses to access finances, there is very little improvement. Data has been collected by the Bank of England since 2011 and the results shows that the figures have been reducing every single month. Medium and small businesses have been affected, despite the banks promising them the availability of credit. All businesses loan has remained subdued because they have used the low interest rate to pay off their debt to their advantage.

The Bank of England voted 9-0 to hold the interest, little indication to increase the borrowing cost was shown. The Governor Mark Carney, warned individuals with loans not to get to comfortable with the low-interest rate. He indicated that after the 7-year low interest rates, it will go up in the two years. The bank is said to have soften its viewpoint on inflation for more than a year as the prices of world commodity tumble. The bank changed their decision on inflation because the wage growth was decreasing. It is also expected to increase the interest rate by the end of 2017 to 1.25% and in 2018 by 2.25%. Furthermore, the rate will not be increased until the unemployment rate falls to 7% or less. But as long at the rate remains above 7% the rates will be increased.

The Bank of England’s governor assured the people that inflation rate is being worked on by the committee of the monetary policy to reduce the inflation rate to 2%. The growth of Britain’s economy could be affected by the inflation rate and the low interest rate despite it being one of the biggest and rapidly growing economies. In addition, concerns were raised when they were intentions of withdrawing Britain’s European Union membership. Internationals markets, Bank of England and economic trend will continue to determine the changes in Britain’s economy (Christensen, & Rudebusch, 2012). Carney stated that the global economy is experiencing low interest rate and low growth thus the chance of getting into a financial shock is very high. He further stated that the only way to avoid this is by avoiding the reductions of current rate of 0.5% to less than zero, this would guard the building societies and UKs Bank’s profitability.

Conclusion

The low interest rate saw different reactions from investors, the public, and economist. The economists advised the country to use different ways to improve the economy growth and are against increasing the interest rates. For the last 7 years, the economy of Britain has benefited because of the low interest rates. Whether the rates will remain at the same low rate in future is still unknown. The only thing that will affect and cause the interest rate to be increase is the rise of inflation rate. The bank of England will continue to focus on maintaining the countries price stability and to keep the economy in check (Blanchflower, 2009).