It wasn't that long ago that most economists were predicting that the Bank of England would raise interest rates this month. But while savers would welcome this, after more than two years of record interest rate lows, it now looks like it's not going to happen.
A spate of weak economic data means there has been a major reversal. Some economists now aren't looking for a rate hike until 2013.
How rates change
While economists are adept at making predictions, it's the nine members of the Bank of England's Monetary Policy Committee who make the decisions about UK rates, and at the last meeting only three of them voted to hike.
The champion for the rate-hiking faction is Andrew Sentance who takes his place at the BoE for the last time this week before he leaves the committee at the end of May.
In a recent speech in Manchester, Sentance said the thing he is most disappointed by during his time on the committee is the persistently high level of inflation, which during his 55 month tenure has been above the Bank's 2% target five times more often than it has been below it.
If this keeps Sentance awake at night, why doesn't it seem to bother Bank of England governor Mervyn King who argues against raising interest rates even though the price of everything from petrol to bread has increased substantially over the past year?
King says that the economic recovery is too fragile and wage growth is still extremely weak. Indeed wage growth in the UK is 2.1% per annum, way behind Germany where pay packets are growing at more than 3.5% a year and only just above the US, where annual growth is a meagre 1.7%.
So if the Bank was to hike rates then the consumer would be hit, because wages aren't rising at the same speed as costs like mortgages and credit card bills. King fears this would push the economy back into recession.
The worst economy since 1870
The same argument is used by Roger Bootle, economic advisor at Deloitte, the accountancy firm, who argues in Deloitte's latest quarterly outlook that households are facing the biggest squeeze to their incomes in 141 years due to public spending cuts and weak wage growth. Due to this Bootle argues that rates need to remain on hold for at least another 19 months.
Sentance counters this argument by saying that eventually employers will give have to raise wages because, firstly, increases in pay packets have been on hold for too long and — secondly — as prices of food and energy rise employers will have to pay their staff more so they can afford the hike in the cost of living.
[See also: Households face biggest squeeze since 1870]
Rising pound, falling prices
This argument hinges on Sentance's theory that a rate hike will actually help to bring down the price of the essentials we are all having to paying more for. This is because higher rates should put upward pressure on the value of sterling.
Since most of these commodities are priced in dollars, if the pound goes up against the greenback then we can buy more for less, saving all of us some hard-earned cash at the pump and in supermarket.
[Useful: How to cash in on the pound's value]
Who is right?
The arguments are persuasive on both sides. But essentially it comes down to this: Do you want to pay more for debts like a mortgage (especially if you are on a variable rate) while other prices are also rising and take the risk that your employer will up your wages in the future? This is essentially what Sentance is asking people to do.
In contrast, King is saying that even if the Bank hikes rates in May or June, the chances are that it won't dampen commodity price pressures, which are fuelled by external factors like civil unrest in the Middle East and adverse weather conditions disrupting the supply of crops.
Added to this, King argues that firms are unlikely to up people's pay packets en masse due to, firstly, a weak recovery and — secondly — public sector job cuts that will swell the pool of people looking for work in the coming months and years dampening wage pressures.
So if we haven't been this worse off for nearly a century-and-a-half, then a rate hike isn't going to be warmly welcomed by the majority of people in the UK.
On top of this, increasing the cost of borrowing hits more than just the man or woman on the street. It affects the people employing them. Higher costs could push more firms bust, or see them lay off staff to cut costs and stay in business. Something that could make the economy even worse.
And a stronger pound, which Sentance hopes would bring down commodity prices, would also make UK goods more expensive overseas — another thing that could put pressure on British businesses and jobs.
As the majority of the people who set the interest rates in the UK agree with King, that the risks are too high to raise rates right now, don't expect to see the rates on your savings — or your mortgage cost — rise much in the months to come.
But the trade-off for record low interest rates is higher commodity prices. So expect to pay more for your essentials for some time yet.
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