Whilst it may not be good news for savers, borrowers were given a boost this week after falls in money market rates indicated that low interest rates may be here to stay.
Recent worse-than-expected inflation figures had led the markets to believe that an interest rate rise may be on the way. However, with inflation fears receding, the likelihood of a rate hike is reducing, resulting in money markets hitting an all time low this week.
Swap rates at all time low
Swap rates are the rates at which financial institutions lend and borrow money to each other over fixed periods of time. They also give an indication of where markets expect rates to be over the next few years. The rates for two year borrowing fell to 1.36 per cent on Monday – an all time low. This predicts that interest rates are going to increase, but at the slowest rate since the bank rate was reduced to 0.5 per cent in March 2009.
The minutes of July’s Bank of England MPC meeting were released this week showing that one member – Andrew Sentance – once again voted for an increase in interest rates. However, the minutes and the money market rates suggest that the Bank of England are unlikely to increase rates in the near future. If the economy continues to struggle, they may also revive their policy of ‘quantitative easing’ – pumping money into the economy by buying government bonds.
Tight credit conditions
Howard Archer, an economist at City research firm IHS Global Insight said, “The Bank of England's July Trends in Lending survey very much maintains concern that tight credit conditions could hold back the recovery.
“Lack of access to credit for smaller businesses is still a serious problem despite some reports that it has risen slightly in recent months. This keeps open the possibility that the Bank of England could yet revive quantitative easing. However, we believe that this will only happen if the economy shows serious signs of faltering over the coming months.”