Base Rate Rise Essential to Prevent Downturn

by Gill Montia

Story link: Base Rate Rise Essential to Prevent Downturn

The deputy governor of the Bank of England, Sir John Gieve, has warned that interest rates need to rise in early July to ward off the prospect of an over inflated property marked and to slow the growth in borrowing for buyout and private equity takeovers.

Sir John believes that failure to act could endanger the banking system and cause a financial downturn. The Bank voted narrowly against an interest rate rise in June and is expected to raise its base rate from 5.5% to 5.75%, in July. This would be the fifth rise in the past 12 months and as such would inevitably put pressure on household budgets.

According to the deputy governor, failure to increase the base rate would heighten certain distortions in the UK economy. He attributes these distortions to London having become pre-eminent in the private equity and hedge fund financial sectors, resulting in commercial property prices in the City rising to twice those of New York and Paris.

In addition, house price inflation in London is well ahead of the rest of the UK, with prices in some areas of Kensington and Chelsea increasing 40% since the beginning of 2005.

The boom in private equity and hedge fund business meant that, in 2006, 4,200 employees in the Square Mile were paid bonuses worth over £1 million. However, as London’s position in financial markets is enhanced, the City also becomes increasingly vulnerable to the cycle in international finance.