Transcript - Episode 3: What's next for UK interest rates?


Hannah Audino:  Hello I'm Hannah Audino from PwC’s Economics team and welcome to our 3rd episode of our Economics in Business Podcast series.  Today I've got Andrew Sentance with us, a Senior Economic Advisor in our Economics team here in PwC and a former member of the MPC of the Bank of England, and we're going to be talking about the outlook for monetary policy in the UK. 

So a bit of background to this discussion.  The Bank of England lowered interest rates to a new record low of 0.25% following the Brexit referendum last year and it’s held the rate at this low level since then, while across the pond we have seen the Federal Reserve gradually tighten monetary policy.  Now given inflation is rapidly on the rise in the UK, the debate is now hotting up on whether we can expect a rate rise in the near future.  So Andrew, should the UK follow in the US’ footsteps and raise interest rates?

Andrew Sentance:  Well the UK shouldn’t slavishly follow the US in monetary policy but there are some similar influences that the UK needs to pay attention to.  Our unemployment rate is relatively low, our growth rate has been reasonably strong and as you commented inflation has been picking up and those factors persuaded the US Federal Reserve to raise its interest rate gradually from nearly zero to probably around about 1% now and is probably going to go up further.  So, I think the UK should be seriously thinking about the same policy.  We can’t indefinitely have interest rates close to zero. That is not a sustainable position for the economy and therefore these are conditions in which, even with all the uncertainties we face around Brexit, the Bank of England should be thinking about gradually raising interest rates.

Hannah:  What are your thoughts on whether that would undermine the recovery, especially given the renewed uncertainty regarding Brexit after the election?

Andrew:  Well I make two points about that. First of all the economy has savers and borrowers.  So yes, borrowers may end up paying more, but savers will end up getting more and therefore the swings and roundabouts of interest rate policy maybe mean that it is not going to be such a dramatic impact on economic growth. But secondly, it is very much about the way monetary policy is conducted. So a gradual rise, as we have seen in the United States, if people understand the reasons for it, and they can plan for it, actually can be well absorbed by businesses and the public in the economy.

Hannah:  So say the Bank of England keeps rates low. If the US needs to raise their interest rates, is this gap sustainable?

Andrew:  Well the gap, you know, will exist and I think we have to think about the consequences of it.  It is going to push down the value of the pound versus the dollar and it is going to push you up imported inflation which we have seen quite a lot of recently.  So, it is not unsustainable but it is adverse potentially for consumer spending and for the growth of the economy because it feeds through into imported inflation and that’s not a good thing.

Hannah:  Yes absolutely.  So given the recent rise in inflation in the UK up to 2.9% now.  How do you think this will affect the decisions of the MPC?  Will they view it as a temporary rise to inflation and not raise interest rates or do you think it will cause them to take action now?

Andrew:  Well their stated stance and the basis on which the MPC has operated in previous occasions when this has happened has been to, what they call, look through these short-term rises in inflation, but I am not sure that is the right thing to do now.  Unemployment is now very low, vacancy rates are very high.  The economy is operating at a much higher level of utilisation and if we can’t raise interest rates in these circumstances you have to ask the question about when will we raise interest rates. So this is an opportunity of which we have seen in the last few years where the Bank of England could have edged up interest rates and I don’t think it would have done much damage to the economy but they seem reluctant to do so.  Now you have to ask Mark Carney and other members of the MPC why that’s the case. But personally I don’t agree with them.

Hannah:  So looking into the longer term.  What’s the outlook for interest rates in the UK especially when the Brexit uncertainty has hopefully been resolved?

Andrew:  Well I do think across the western world, led by the US, we will see interest rates going back by the early 2020’s to about 2% to 3%.  That’s not where we were before the financial crisis where there were 4% to 5% but that at least offers savers some sort of degree of compensation protection for inflation.  That is a more sustainable position than where we are now.  I think that will ultimately happen.  Predicting the timing is very difficult because we are in a very uncertain political environment but we have to remember the Bank of England is meant to be independent of politics and perhaps we haven’t seen enough of the Bank of England asserting its independence in recent years.

Hannah:  And can you just talk a little bit about the UK economy in general at the minute and the outlook in the shorter term.

Andrew:  Well I think there are going to be two drags on the UK economy over the next year or two.  One is that investment is quite affected by the uncertainty around Brexit and we have already seen last year business investment falling and probably will be a slight dampener over the next couple of years.  And also we see consumer spending being squeezed by the fact that inflation is rising relative to wages, inflation of 2.9% already exceeds wage growth which is only just above 2% and that’s not very good for consumer spending.  But on the other hand the UK economy is very dependent upon international factors and the international economy is doing probably better than it has done at practically any a time since the financial crisis. 

So we have got fairly strong growth in Europe, in Asia and in North America and that’s going to support the UK economy.  So the net impact of those factors is the UK economy so the net impact of those factors is that the UK economy will probably slow down a bit but won’t go into any sort of catastrophic recession.  It is going to be dampened rather than dragged into negative territory.

Hannah:  And we are forecasting growth at around 1.5% for this year and next, is that right?

Andrew:  I think that is a reasonable estimate based on the evidence that we have at the moment.  Obviously when the facts change, you know, we need to change our forecast but so far that looks a reasonable estimate.

Hannah:  Great.  Well thanks very much Andrew for coming in to talk to us today and if you'd like to read more about UK economic insights, head over to and as always please subscribe for future podcasts.

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