How long can interest rates be held at 0.5%?

The MPC announced Thursday its decision to hold interest rates at 0.5%, marking the thirteenth consecutive month at the record low rate. The decision came as no surprise to many economists who believe that the UK’s economic recovery still remains somewhat fragile and that any interest rate rise may hinder this recovery. Growth figures have continued to exceed estimates but the Bank believes economic growth is still not a certainty, and hence feels that they have no choice but to hold rates constant. On the other hand, this has not come as welcomed news to dismayed savers, who argue that they were not the ones who caused economic collapse yet they are the ones now paying the price, struggling with reduced incomes and watching, in front of them, their savings shrink significantly in real terms. Therefore, many people have begun asking and wanting to know how long interest rates are going to be held at such low rates. What can be done for responsible savers who are losing out? Is the economy strong enough yet for increased rates?

Greece default risk

A big story of the past month has been the Greek sovereign debt problems. Many people are keenly interested in seeing how this story progresses as this is one of the first major problems the Eurozone has faced unifying. The Euro has taken a beating on international foreign exchange markets with speculators taking short positions, and many are worried as to how the major players in the Eurozone will react.

Greece has been able to take full advantage of its Euro membership, and was buoyed by cheap interest rates from the European Central Bank. Now, the economy is shrinking and has massive debt problems which threaten to derail the Euro`s prospects of challenging the US Dollar as the international reserve currency. The Euro has already slid by 6% against the dollar this year alone. Now, the finance ministers and politicians of Europe have to deal with this tough issue. There has been controversy over how to remedy the situation, with different countries squabbling over the correct method. There are also tricky laws in EU legislature in play which prohibit the outright loans to member country.

Germany and France have been leading the charge, however as of yet they have only propped up Greece with promises of support and backing; no concrete plan has been established. It is imperative that Greece is aided, yet it must be done so in the right way; just throwing money at the situation or completely ignoring it will do no good. If the remaining member countries were able to somehow manoeuvre funds into Greece, it would have to come at a price. The Greek government must be forced to endure hard cuts to its fiscal spending, as it simply cannot afford to continue on the path it is on. It has gotten so bad that Greek bonds, even with the safety net of the Euro, rose to over 7% higher yields than on their German counterparts. The question everyone is now asking is whether or not Greece will default, and what are the likely repercussions for the eurozone.