Base rate: unemployment 'trigger' could lower to 6.5%

The Base Rate has been 0.5% for nearly five years now – still a record low in Britain. Higher interest rates are more sustainable in the long term, but will 2014 be the year when the Bank of England makes the decision to increase them?

The Bank of England Bank Rate (also known as the Base Rate) has been 0.5% for nearly five years now - still a record low in Britain.

In its attempts to trigger the economic recovery and make it cheaper to borrow, the Government has had to accept various negative side effects, such as historically low savings and pension-payout rates. 

Higher interest rates are more sustainable in the long term, but will 2014 be the year when the Bank of England makes the decision to increase them?

In December, the money markets, which reflect traders' expectations for the Bank Rate, suggested a rise midway through 2015, but this forecast has since been revised to slightly earlier. 

The Bank of England stated in its forward guidance issued last August that nothing would be done to interest rates until UK unemployment fell to 7%. At that time, the 7% target seemed some way off, with the Bank's own economists predicting that number wouldn't be reached before 2016.

However, since then, the unemployment rate has fallen from 7.8% to 7.4%. Another similar reduction could possibly put a small rate rise to 0.75% on the agenda.

Despite this, most commentators feel that the Bank is highly unlikely to make a change to the rate in 2014 and there is increasing speculation that the BoE governor, Mark Carney, might soon declare that the unemployment rate trigger will be lowered to 6.5% to avoid having to put up rates.

Even if that threshold is reached, any sudden increase in the Bank Rate would push up mortgage costs and threaten Britain's already fragile economic recovery, so 2015 is still looking like the most likely point at which the Bank Rate will rise again.