Interest Rates

Having languished at an all-time low of 0.5% since March 2009 in the UK, interest rates have returned to the spotlight. At the start of June, the European Central Bank cut its deposit rate for banks from zero to -0.1%, in order to incentivise banks to lend instead of sitting on their deposits. Meanwhile, closer to home, discussion over the future path of UK monetary policy is intensifying, with an increasingly stable economic recovery stoking speculation rates might rise sooner than expected.

Although members of the Bank of England's interest-rating setting committee appear to be moving towards a possible increase, a rate rise is still not expected until next year. The Monetary Policy Committee expects the eventual increase to be gradual, and to a level "materially below (their) pre-crisis average". For its part, Ernst & Young's ITEM Club expects UK rates to remain low "for some time yet", curbed by a relatively benign inflationary backdrop and by sterling's continued ascent. Meanwhile the Confederation of British Industry has tipped interest rates to climb to 0.75% during the first quarter of 2015, compared with its previous forecast of a rise during the third quarter.

Of course, the ongoing discussions surrounding the possible timing and pace of monetary tightening are not necessarily proving helpful. Indeed, the British Chambers of Commerce has warned that the speculation is "hampering businesses' ability to plan future investment", and urged the Bank of England to implement rate increases "in an orderly and predictable fashion".

Looking ahead, however, there are fears the finances of many UK businesses and households are not strong enough to cope with the effects of higher rates. A significant increase in rates would present substantial financial problems for many householders, according to UK Asset Resolution, and could force some mortgage holders into arrears. Meanwhile, Bank of England Governor Mark Carney has warned that surging UK house prices present a substantial threat to the UK's economic stability. His viewpoint has been backed by the International Monetary Fund (IMF) , which cautioned the UK government that rising property prices and lacklustre productivity pose the principal risk to the UK's recovery. The IMF warned that UK households are becoming "more vulnerable to income and interest rate shocks" and urged the government to consider cutting back or even withdrawing its 'Help to Buy' scheme if house prices continue their surge.

As Independent Financial Advisers, we consider other methods of 'cash extraction' for investment or business growth, such as retirement monies and the like. We feel it can offer greater control for the business owner both in respect of their business and personal financial planning.