FXStreet (Delhi) – Simon Wells, Chief UK Economist at HSBC, suggests that the implications of low interest rates of UK will result in the fact that real interest rates may be permanently lower with huge implications for growth and monetary policy and the team now forecast a slower pace of tightening. Key Quotes “The evolution of the natural real rate of interest - the real interest rate that would keep inflation stable and output at its potential - will be crucial in determining the path of policy rates. Regardless of when the tightening cycle begins, the path of rates will depend partly on how quickly the current natural interest rate reverts to its long-run level.” “Most estimates put the current natural real interest rate around zero. The BoE's latest forecast implies little change in this rate between now and 2018. Given that natural interest rates and economic growth are determined by similar factors, this forecast suggests headwinds to growth. Yet the BoE's growth forecasts remain above trend through this period. Squaring this is hard: either policy rates will rise faster than the market currently expects or the BoE's growth forecasts will have to be pared back, perhaps substantially.” “Even when the natural real rate does rise, its long-run level could be as low as 1%. Given this, and in light of the recent EM slowdown and softening in domestic data, we now expect only two 25bp interest rate rises in 2016 (compared to three previously). We still think the BoE could increase rates in Q1 2016, provided that the Fed moves in December, because the output gap is closing and wage growth rising. We forecast two more interest rate rises in 2017, meaning the Bank Rate will be just 1.5% at the end of that year.” “If interest rates are never going to rise to the levels seen in previous cycles, they are less effective as a monetary tool because they cannot be cut so readily. Hence the BoE and other central banks will need to develop a toolkit where unconventional measures become regular features. Investors and economists need to consider the implications of negative interest rates and balance sheet policies such as QE or credit schemes - they may be here to stay.” For more information, read our latest forex news.