On Tuesday, outgoing Bank of England governor Mervyn King stressed the importance of keeping interest rates low in the short-term. The Bank’s base rate has remained unchanged at 0.5% since 2009.
However, CooperCity.com founder and qualified analyst Louise Cooper said his successor might be forced to raise interest rates: “Mark Carney might come in and say, ‘I want to keep interest rates at 0.5% for at least a year,’ but if the economy gets a lot stronger he is going to have to raise interest rates.
“A normal base rate is at 3%, 4% or 5%. We’re at 0.5%. That’s extraordinary. Even if it was at 3% it would still be highly stimulative.”
Money markets around the world were anticipating an interest rate increase, she said, while gilt yields – on which mortgage interest rates are partly priced – were likely to rise to a more normal level.
Cooper also predicted the economy was likely to recover quicker than expected: “They are going to have to raise interest rates if the economy booms, otherwise it will boom and bust incredibly quickly with massive inflation.
“If the economy gets going they will have to put up interest rates irrespective of the housing market.”
Interest rates have been the subject of market speculation in recent days after US Federal Reserve chairman Ben Bernanke indicated he could be pulling back on quantitative easing if the economy improved.
By contrast, King has maintained it is in central banks’ interests to keep interest rates low.