Support 100 years of independent journalism.

  1. Business
26 June 2013updated 22 Oct 2020 3:55pm

It’s not surprising that interest rates might finally be on their way up

Carney's warning not all that shocking.

By Andrew Amoils

New UK bank governor Mark Carney warned yesterday that interest rates could finally be on their way up after over four years at 0.5 per cent.

The move would not be surprising for a number of reasons:

  • Savers, particularly the elderly, are coming under increasing pressure due the low rates over the past four years.
  • UK house prices have begun to recover. According to figures from the Land Registry, house prices in England & Wales rose by 0.9 per cent in 2012 and by 0.1 per cent in the first four months of 2013. Although this growth is moderate, it does show that the market is stabilizing.
  • The British Pound has deprecated by 5 per cent against the US dollar so far this year. This has impacted on inflation which rose from 2.4 per cent in April 2013 to 2.7 per cent in May 2013.
  • The UK stock market (FTSE 100) is up by 7.6 per cent so far this year in GBP terms and by 3.7 per cent in US dollar terms (as at 19 July 2013).

Increasing rates will a number of effects. It will:

  • Encourage more investment in the UK bond market which will help support the Pound.
  • Reduce consumer spending which will put downward pressure on inflation.
  • Cause people to pull money out of the stock market and move it into cash.
  • Put pressure on the housing market, particularly at the lower end.

The last point is the one that will weigh on the mind of Mark Carney the most. This is mainly due to the fact that over 60 per cent of UK individual wealth is tied up in the property market (according to the ONS). This is one of the highest proportions in the world and explains why the UK’s fate is so heavily linked to property. In contrast, German’s have less than 20 per cent of their individual wealth in property which shows why they are less susceptible to changes in its value.

In GBP terms, UK residential prices have declined by 12 per cent since their peak at the end of 2007 (Source: Land Registry). In US dollar terms the decline has been even more alarming at 34 per cent. This means that the average UK individual has lost over 20 per cent of their US wealth over the past five years due to the decline in property prices.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. A weekly newsletter helping you fit together the pieces of the global economic slowdown. The New Statesman’s global affairs newsletter, every Monday and Friday. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s weekly environment email on the politics, business and culture of the climate and nature crises - in your inbox every Thursday. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A newsletter showcasing the finest writing from the ideas section and the NS archive, covering political ideas, philosophy, criticism and intellectual history - sent every Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.

Content from our partners
How to create a responsible form of “buy now, pay later”
“Unions are helping improve conditions for drivers like me”
Transport is the core of levelling up