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What You Really Need to Know About UK Interest Rates

22/10/2014 16:05 BST | Updated 22/12/2014 10:59 GMT

There's a rebellion at the Bank of England. The 9 strong committee that sets the UK's base rate currently has 2 dissenters. The breakaway pair think interest rates should rise from their record low of 0.5%, now. The split in opinion has fanned the flames of the media fire on rising interest rates. Every new piece of economic news from unemployment and inflation through to GDP and retail sales, is presented through the prism of "what this means for when interest rates will rise."

Economists and other commentators play the same game, queuing up to say that X, Y and Z suggest that rates should rise in this month or that. Opinions are strongly held. Sometimes the clashes get ugly. Unfortunately, nearly all this noise misses the point and distracts from the bigger issues.

The debate is often framed as when in 2014 rates should rise. But it is also worth asking if rates should rise at all. Increasing concern over the chance of deflation in the Eurozone makes that a pertinent issue. UK inflation has followed Eurozone levels very closely over the last 5 years, suggesting that price pressures are still far away. Slowing growth across Europe means that, now more than ever, the future cannot be taken for granted.

Strong opinions imply confidence in the outcome. Experience tells us the opposite. Recent economic history is littered with the junked forecasts of experts. There's good reason for that fact, forecasting the future is hard. But that's not the impression you're given by much of the discussion. The precise month in which interest rates rise from 0.5% to 0.75% is almost irrelevant compared to what happens after rates rise. That's because the further we look into the future, the more uncertain we are about where interest rates will be.

Right now experts think there's roughly the same chance of interest rates at the end of 2016 being 0.5% as 2%. Those are two very different scenarios, no rate hikes or six rises of 0.25% in the next two years. But two years isn't the far distant future for many of the decisions that matter. Whether you are working out what to do with your savings, thinking about what mortgage you can afford, or considering investing in your business, what happens after the first rate rise matters and matters a lot more than the month it changes.

Over the next few months I'm going to be leading research at RBS on this topic. We'll be talking to our customers about interest rates and the decisions they think they'll make when rates change. We want to understand how we, and the industry itself, can help. This won't end the fevered speculation about the timing of the first rate rise, but next time you're listening to the debates, ask yourself this question. Does this tell me what I really need to know about UK interest rates?