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Will the UK follow the US lead with a rate hike?

Posted by
05 Jan 2016
The US Federal Reserve raised the interest rates in December by 0.25 per cent; this is an indication that policy makers believe the economy maybe growing too fast.  An interest rate hike has the effect of encouraging people to spend less of their income and save more, thus slowing the economy and by effect creating a reduction in inflationary pressure. This is clearly an indication that the Federal Reserve believes the economic turmoil which began in 2008 is ending and the economy is in a position of being able to absorb such a rate hike.

One reason for the turnaround is the job growth that the US has seen over the past year; this is believed to lead to wage increases and the result is discretionary income. It is believed that when the interest rates are low there is an increase in risky business investment as they seem more affordable, so by hiking the interest rate the Federal Reserve hopes to stall this from happening. Traditionally interest rates have been kept low so as to keep the cost of servicing the national debt low, and by default, the tax base low.

It seems likely that the UK will follow the lead set by the US – not least of which because the current UK interest rate is the lowest it has ever been, since 1694 when the Bank of England was founded. This can only mean that there is a potential for rampant speculative investments to be created in the UK, which in turn will create the type of financial instability the country would be best to avoid. In both countries it can be seen that government do not want to raise the interest too high. Indeed, both countries are reportedly viewing a 0.2 per cent hike as one that will keep the economy healthy and which will create a great level of resilience than what is currently being gained.

What are your thoughts on the rise of interest rates? I'd love to hear your thoughts in the comments below... 
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