Savings: Unexpected fall in unemployment sparks interest rate speculation

A larger than expected fall in the rate of unemployment, has led to speculation that interest rates could start to rise sooner than previously expected.

The Office for National Statistics (ONS), announced this morning that unemployment dropped sharply by 167,000 in the three months to November. The number of people out of work now stands at 2.32 million, equivalent to 7.1% of the UK’s population.

Last year, Mark Carney, the Governor of the Bank of England, said that the Bank’s Monetary Policy Committee (MPC) would consider pushing up interest rates when the unemployment rate fell to 7%. Carney indicated at the time he thought this would not be until 2016 and although it looks as though this threshold will be met way before that date, there is no guarantee that the Bank will increase base rate, which has been stuck at 0.5% for over four years.

Indeed the minutes from the last meeting of the MPC said: “Members therefore saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future.”

The minutes went on to say: “Moreover, it was likely that the headwinds to growth would persist for some time yet, and that inflationary pressures would remain contained. Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.”

Responding to today’s unemployment data, Simon Rose of Save our Savers, agrees: “Although a growing number of commentators believe the Bank of England should now start restoring interest rates to normality as the economy picks up, we are not holding our breath. We think they will wait as long as they possibly can before acting.”

Rose continued: “The forecasts that lay behind ‘forward guidance’ proved staggeringly inaccurate, even by the woeful standards of the Bank’s usual economic forecasting. Yet the MPC remains utterly blind to the havoc that five years of record low interest rates, supplemented by £375 billion of Quantitative Easing, have caused.”

Still hope interest rates to rise in 2014?

Despite the Bank of England suggesting interest rates won’t necessarily rise as soon as the unemployment rate hits 7%, there is still cautious optimism that savers may start to see more competitive rates as the year progresses.

One of the key reasons behind the fall in savings interest rates was the launch of the Funding for Lending scheme in August 2012. This scheme gave banks and building societies access to cheaper wholesale finance, which reduced their reliance on savers deposits and consequently saw interest rates fall.

But, from January the Funding for Lending scheme has been withdrawn from mortgage lenders. This means that once funds already drawn down have been exhausted, banks and building societies will have to revert to more traditional sources of funds, including savers.

Many experts therefore believe that as we move through 2014, we could see interest rates on savings accounts start to rise, even if the Bank of England keep base rate at 0.5%.

Savers have had some good news already this year with the rate of inflation falling to just 2%, making it easier to find a real return. However, savers fingers will remain crossed that interest rates start to rise over the next 12 months, to provide relief from a sustained period of negative returns from Cash.