Future of Interest Rates in UK
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The latest date from the Office of national statistics shows that prices rose
less than expected in the previous month. The CPI measure of inflation remained
at 2.4%. The RPI (which includes housing costs) rose to 3.7%. However this was
less than expected and in the Bank’s latest inflation report they reduced their
inflation forecasts for next year to “around 2%” for the middle of next year.
The reasons for offering a lower inflation forecast is due to a number of
reasons. Firstly oil prices have fallen,by 23% since August, due to increased
supply from OPEC. This feeds through into lower transport costs. Also
Unemployment continues to edge up, it is now 1.7 million up by 27,000 on the
previous month. With rising unemployment levels it is likely that wage rises
will be moderated. However the Bank did mention a note of caution. They said
with regard to the labour market it is hard to predict future wage inflation
because of unreliable data collection. For example they mention that it is
difficult to calculate how many eastern European workers are entering the
country. If there are more migrants than measured it will help to keep wage
However despite difficulties with some statistic many economists are now
predicting the UK economic cycle has peaked and the future trend of interest
rates may be downward.
However there is still the possibility interest rates may continue to rise in
the future. Firstly CPI inflation is still forecast to rise to 2.7% in the next
couple of months. Also the levels of borrowing continue to reach all time highs.
This is illustrated through the rapid growth in M4 (broad measure of inflation.)
Although money supply is often an unreliable guide to inflation there is
evidence that money supply growth of 14% may cause inflationary pressures in the
future. With recent talk of 125% mortgages the Bank’s governor Mr King said that
“Some people had taken on far more credit than it was ever plausible to
He went on to say it was a real social problem but not one that would
directly affect interest decisions. In addition to high levels of consumer
borrowing the ever resilient housing market still provides ammunition for
inflation hawks. With house prices continue to rise this could be a continued
source of higher consumer spending and possibly inflation.
Overall the report is good news for those home owners who are worried about
rapidly rising interest rates. The most likely scenario is only a very small
future rise in interest rates.
About the Author
R.Pettinger is an Economics teacher at Oxford and writes frequently on the UK
economy and mortgages. He edits a site about Mortgages including a guide to
different types of mortgages.
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Article Published/Sorted/Amended on Scopulus 2007-03-25 20:17:10 in Economic Articles