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  • Essay / Central Bank Tools - 835

    Interest rates are a tool that central banks use to implement monetary policy. They represent the percentage rate at which interest is paid by a borrower for the privilege of using the money lent to them and interest can be paid at different time intervals. Higher interest rates will impact inflation and employment and could lead to reduced consumer spending and investment. The Bank of England meets every month to set the UK bank rate. The Committee is made up of nine members and they are informed of all the latest data on the economy and economic conditions. Their task is to keep inflation below 2% but above 1% over the next two years. In the UK, the current interest rate, also known as the base rate, set by the Bank of England, is 0.5%. This is a historic low that was put in place over the past five years to help the country recover from the recession caused by the financial crisis. It is expected that interest rates will need to rise sooner rather than later, although there is much speculation as to when the first rate hike will occur, which is expected to take place in the first half of next year. The new normal rate level is expected to be 2-3%, well below the 5% from the late 1990s until the financial crisis. In 1976, interest rates reached 15%, and double-digit interest rates were not uncommon between 1975 and 1991. Mark Carney, the Governor of the Bank of England, and Charlie Bean, the outgoing MP , both indicated that rates would peak around 3%. within 3 to 5 years, below the pre-crisis average of 5%. There have been indications that rates could start to rise over the next 12 months and in the latest Bank of England meeting minutes it appeared that a...... middle of paper...... rest rates reach 1.75% annuity rates could be 12.5% ​​higher. The value of the pound sterling would increase if interest rates increased. International investors would be more likely to use UK banks for their savings if interest rates in the UK are higher than in other countries. A strong pound also makes UK exports less competitive, which could have the effect of reducing exports and increasing imports, reducing overall demand in the economy. Interest rate increases also have the general effect of reducing consumer and business confidence, which has the effect of discouraging risk-taking and investment. It is difficult to predict when rates are likely to increase. One indicator that can help predict when interest rates are likely to rise are overnight swap rates, which often influence market rates for fixed rate mortgages and fixed rate savings bonds..