Friday, 14 February 2014

Flagship Interest Rate Calculation Policy Sees Adjustment

Current Governor of the Bank of England Mark Carney announced this week that the Bank is making adjustments to its flagship interest rate calculation policy. What could this mean for the industry of business acquisition in the UK?

The consequences of the 2008 financial crash saw the Bank of England announce last August a forward guidance policy that would hold interest rates at their current low of 0.5%. However it tied this to unemployment. The Bank said it would only consider raising interest rates when unemployment fell nationally below 7%.

Industry experts have touted the policy as a success that has helped the country on its way to sustained recovery after the Great Recession. Carney has since noted that his flagship policy had reduced uncertainty in the market which has encouraged industry players to spend and hire.

So there is a direct link to the forward guidance policy. Lower interest rates mean that companies have more cash to spend, which means that they have more to expand, meaning that they can hire more staff. This would lower the rate of unemployment which would then negate the need for the policy, meaning it could be dropped.

However unemployment has dropped quicker than anybody expected; it’s already hovering fairly close to the 7% threshold. This had led many to fear that interest rates would go back up. However it appears that Carney still sees a need for the policy.

Therefore the benchmark to measure when the policy should be lifted has changed. The Bank announced that as well as unemployment rates, many other contributing economic factors would be considered when deciding when to lift the forward guidance on interest rates. They also said that when interest rates are raised, it’ll be gradually.

In a Bank report Carney noted that "forward guidance is working - expected interest rates have remained low even as the economy has recovered strongly,” and that the policy needs to be revisited "as a result of exceptionally strong jobs growth." The report categorically stated that the "Bank rate may need to remain at low levels for some time to come."

RTA Business sees this as positive news for the industry of business acquisition. Low interest rates have meant that business has grown and people are looking to expand now for the first time in years. It’s likely that low interest rates being maintained will encourage more business owners to buy out other businesses in the name of expansion. 


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