City Watch: Brian Tora warns of a false sense of security on interest rates

Brian Tora of J M Finn & Co

Brian Tora of J M Finn & Co - Credit: Archant

There have been a lot of comments recently on where interest rates might be going. Not only has the governor of the Bank of England, Mark Carney, delivered sometimes conflicting views on what the future might hold for the cost of money, but senior figures associated with the Monetary Policy Committee, which sets the level of interest rates, have delivered their form of forward guidance.

Sir Charles Bean, outgoing deputy governor, suggested we might return to the long term average of 5%. MPC member David Miles expects rates to settle down at 3.5%. Given the rate set presently stands at 0.5%, either suggestion, if correct, will doubtless cause borrowers concern.

Part of the reason we are hearing about what might happen to interest rates is a growing concern among policymakers that we are all becoming over confident that low interest rates will persist.

This false sense of security could be behind the seemingly unstoppable rise in the value of residential property in this country. Already banks have to be more stringent in how they process loans.

An interest rates rise is inevitable. It is simply a case of when and by how much. The unemployment target set by the governor as a potential trigger for a rate rise has been met. The fact rates didn’t go up has much to do with worries it could choke off our fragile economic recovery.

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Higher interest rates will benefit some. Pensioners with savings have suffered from disappointingly low returns. Dearer money should boost their income.

We just have to hope that it does not take place against a background of a rising cost of living. While markets do not appear concerned over either interest rates or inflation at present, at some stage they will enter the equation.

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: : Brian Tora is an associate with investment manager JM Finn & Co.

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