The Bank of England Base Rate has now spent a year at just 0.5%.  

On 5 March 2009, the Bank of England cut its base rate to 0.5%, bringing to an end a series of cuts which began in December 2007 with a reduction from 5.75% to 5.50%. Back in March 2009 our bulletin on the 0.5% rate, entitled ‘The Last Base Rate Cut?’, commented that ‘The weapon of interest rates cuts has now been exhausted’. What we did not anticipate is how long rates would remain at 0.5%.

In its current independent guise, the Bank has kept rates steady for twelve months or more before: base rate was stuck at 6% for two days short of a year from February 2000, at 4% between November 2001 and February 2003 and at 4.75% for exactly 12 months from August 2004.

What makes the current time spent at 0.5% different is that not only is the rate at rock bottom, there is as yet little expectation of any increase much before 2011. Nevertheless a few things have moved since 5 March 2009:

Alongside the 0.5% base rate there has been £200bn of quantitative easing (QE), which some commentators believe helps to explain the 50%+ rise in the UK stock market. However, although QE has almost been entirely used for gilt purchases, 10 year gilt yields have risen by 0.63% over the period. That probably has something to do with the pick-up in inflation and the ballooning government deficit.

WEALTHFLOW COMMENT

Base rates are already rising in some parts of the world. In the USA the Federal Reserve has taken the first tentative step by upping its discount rate, although the official stance from the Fed Chairman is that rates are likely to remain ‘exceptionally low for an extended period’. That should also prove true for the UK, unless a Sterling crisis intervenes.

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