The slow road to recovery

FOLLOWING the announcement by Bank of England Governor, Mark Carney, earlier this week that interest rates were likely to remain low “for some time” the debate has intensified as to how strong is the British economy?

Some analysts had previously claimed that the Bank may be forced to raise interest rates in the face of signs that the British economy is starting to recover following the 2008 crash.

"Securing the recovery is like making it through the qualifying rounds of the World Cup - it's a real achievement, but not the end goal. The prize in the economy is sustained and prolonged growth," Mr Carney was reported as saying.

One of the problems facing the Bank of England’s Monetary Policy Committee, which decides on the rate of interest, is how to ensure that the increase in the economy is maintained rather than reduced.

While the signs may be positive it is not all good news for the economy. Although stating that the economy is back to 2007 levels may sound good as a politician’s soundbite it fails to take into account the way in which the global financial system has changed.

As minutes from the Monetary Policy Committee demonstrate it is not just the British economy which needs to be considered before making changes to the interest rates:

“There had been further signs of a strengthening recovery in the advanced economies, with modest positive news on euro-area activity and more evidence of continuing expansion in the United States. But weaker data from China had highlighted the continuing downside risks to global activity from the emerging economies.”

 

The growth also does not taken into account the rise in cost of living which has affected so many people, particularly those on a lower rate on income who could be most affected by a rise in interest rates. An average increase in the cost of living by approximately three per cent year on year means that while it may show signs of strength there is still a long way to go for the economy before it is stable.

 

While this may be good news for many it might not be what the Treasury wants to hear. Politicians, as well as the public, it is often forgotten that it can take a couple of years for monetary policies to demonstrate an impact. As Mr Carney has already said, any change is going to need to be “gradual” if it isn’t going to damage the confidence of investors, and the financial system as a whole, thereby destroying what has taken so many years to rebuild.