Northern Ireland borrowers could face higher interest rates in months

The interest rate now stands at the historic low of 0.5%, a level it has been at for over six years, and any increase would be passed on to borrowers, from those with mortgages to those with credit cards.

Since the RBI continues to target a lower rate of inflation and ultimately wants inflation to move down to 4% pa. with a band of plus minus 2%, and commodity prices globally continue to very weak, one should expect inflation to continue to remain lower than what is has historically been.

Ms Shafik occupies one of nine seats on the Bank’s Monetary Policy Committee (MPC), which meets regularly to decide on interest rates.

There is also a strong effort to move monies away from physical assets like real estate and gold to financial assets, and thus savers are being incentivised by being offered rates of return that are higher than inflation.

Speaking at the Institute of Directors in London, Ms Shafik said that while there were “promising” early signs of higher earnings growth at the start of the year, “the rate of wage growth seems to have levelled off again in the most recent data”.

According to the bank’s inflation report from November, market pricing suggests rates will rise to 0.6 percent in the third quarter of 2016.

The disappointing figures further add to expectations that the Bank will feel no pressure to follow suit after an expected imminent rate hike from the US Federal Reserve. Members voted 8-1 against increasing the Bank’s basic interest by 0.25%.

Shafik said all the MPC’s members believed that future rate hikes would gradual and limited, and that they believed a future bank rate of 2 per cent would allow room for a material reduction in a loosening cycle of monetary policy, if needed. Reporting differences make a direct comparison with the United Kingdom difficult, but the USA index showed that inflation was unchanged in November on a seasonally adjusted basis and up 0.5 percent over the last 12 months before seasonal adjustment.

Shafik saw several possible explanations for wage growth easing off: that the number of hours worked per person per week may have started to decline; that employment growth has been skewed towards lower paid jobs; and that the low level of headline inflation may be leading to less generous pay rises.

There are many signs that the economy is normalizing – the labour market is tightening, consumption growth is solid, investment is recovering, and even productivity growth is showing tentative signs of a return.

“And although the downward pressure on inflation from movements in energy prices and the exchange rate are proving persistent, they will not have a permanent effect on inflation”.