5 Years On - The 0.5% base rate is celebrating its fifth anniversary this month.
05 March 2014
On 5 March 2009 the Bank of England halved base rate, from 1% to 0.5%. As the graph shows, base rate had already been on a precipitous decline, having been 5.0% in October of the previous year. The move in March 2009 was an emergency measure at the height of the financial crisis: nobody was expecting that half a decade later base rate would still be at 0.5%.
The fact that 0.5% remains the choice of the Bank’s Monetary Policy Committee (MPC) can be linked to something else that until recently has been almost as static: the UK economy. Even with the near 2% growth experienced last year, the size of the UK economy remains more than 1% below the level it reached six years ago, in the first quarter of 2008.
The outlook for base rates was originally addressed last August by the then newly installed governor of the Bank of England, Mark Carney. His “forward guidance” was that base rate would only be reviewed when unemployment fell to 7.0%, which the MPC projected would be around mid-2016. That did not work out as expected and by January 2014 the unemployment reading was 7.1%, forcing the MPC and Mr Carney to rethink their guidance.
The result emerged alongside the Bank’s February quarterly inflation bulletin and, predictably, guidance is no longer tied to a single figure. Indeed, the Bank suggested that it would be monitoring a wide variety of economic factors to help it make future rate decisions. It also signalled that “if and when the time comes that the economy can sustain higher interest rates, Bank Rate is expected to rise only gradually.” The nearest Mr Carney came to making any forecast was to give an acquiescent nod in the direction of the market’s implied forecast for future base rates, “which approaches only 2% three years from now.”
Of course, a lot could happen in the next three years …or nothing, as in the last five.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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