Are interest rates likely to up in the next financial year 2014-15?

Most people in the UK have been affected in some way or another by the economic downturn. Jobs have been lost and house prices have fallen, but it's not just these high-profile changes that have affected people's pockets on an daily basis – energy bills have also rocketed, along with the prices of most supermarket essentials.

While things have certainly taken a turn for the better in the last couple of years, Mark Carney, the governor of the Bank of England (BoE), said this week that the UK could be at risk of falling back into recession, but why?

Easy loans

Before the crisis started to emerge in 2008, the BoE began introducing lower interest rates on its loans, making it easier for Brits to borrow money – too easy, according to some experts. The change made people and businesses more open to taking financial risks. Basically, not enough of these risks paid off and the country suffered as a result.

With fresh optimism, a number of initiatives have been put in place to once again make borrowing easier for cash-strapped Brits. It is hoped that things like the BoE's own Funding for Lending and the government's Help to Buy schemes will help the UK to complete its recovery.

Perhaps understandably then, Mr Carney is concerned – with more people benefiting from cheap finance, what's to stop the same thing happening again?

The influencing factors

The governor's comments on the situation certainly point to the possibility of interest rates rising; this, after all, seems like the most obvious way to minimise risk. That said, any sudden changes could also impact the UK economy negatively, so care needs to be taken.

Of course, interest isn't just influenced by the rate at which people are borrowing. In August last year, the BoE said that changes would only be made once unemployment falls to seven per cent or below. Perhaps worryingly for some, we're now within touching distance at 7.2 per cent.

To make things a little more complicated, Mr Carney says that a new range of economic variables must be considered before anything is adjusted – this includes the gap between potential and actual output.

So what happens next?

The BoE certainly doesn't appear to be in a huge rush to raise interest rates, although it does seem inevitable that it will happen eventually. Mr Carney has hinted that we will see gradual adjustments, with the end result likely to be a rate of two per cent in 2017. This doesn't really seem like much but seeing as we're currently sitting at 0.5 per cent, it could have quite an impact.

On the flipside, plans are in place to change the Bank's responsibilities slightly, and this could also have an effect. If it is given what it calls “macroprudential” powers, it should be able to ensure the housing market doesn't overheat and that banks have enough capital – this alone would reduce the need to dampen excessive borrowing, meaning interest rates could well remain untouched for a little while longer.

While few people will welcome higher interest rates, it does seem as though it could help the UK to avoid a repeat of the recession that's caused such huge problems for so many people.