Bank of England tries to balance concerns over rising inflation and slowing economy
February 24, 2008
Over the past couple of years the Bank of England has faced tough decisions when it comes to the base rate, with a slowing economy to consider on one hand, which has been fuelled by higher interest rates and lower spending levels, and rising inflation to consider on the other hand. Whilst the Bank of England has cut rates twice over the past three months this followed a series of five rate hikes between August 2006 and July 2007, which left many homeowners struggling to keep up with mortgage repayments.
There has been much speculation over what will happen next with interest rates, as the Bank of England tries to keep a lid on inflation whilst also addressing concerns about the slowing economy. Many industry experts have predicted that interest rates will continue to fall over the course of this year, with some predicting that rates could fall as low as 4%, but the governor of the Bank of England, Mervyn King, recently said that rates were unlikely to fall as fast or as much as many think.
One leading economist from Global Insight recently stated: “Latest data and survey evidence indicate overall that while UK growth is currently clearly slowing appreciably, it is not collapsing. Consequently, the Bank of England seems unlikely to follow the US Federal Reserve in slashing interest rates. Instead, the Bank of England is likely to cut interest rates gradually but steadily.”
Following the release of the Bank of England’s quarterly inflation report another economist said: ‘The basic point is the bank is saying that interest rates are not going to fall as far and as fast as markets currently seem to think. The indication is that it’s going to proceed with bringing interest rates down at a fairly steady pace. That said, I think its forecasts for economic growth are overly optimistic and therefore I think ultimately it will have to bring interest rates down more aggresively than it currently expects. We still think that rates will eventually fall to 4 but that partly reflects the fact that they’re going to bring them down at a slow pace.’
However, there are calls for more rapid rate cuts from a number of industry sectors, with the British Chambers of Commerce stating: “We would welcome a cut to 5% but we understand the MPC may be reluctant to give a misleading impression of panic. We urge the MPC to move to a 5% rate in two rapid steps. The longer it waits, the bigger the danger that the situation could deteriorate.”
The next Monetary Policy Committee meeting is due to take place on March 6th, and at present industry experts are predicting a 50% chance that the interest rate could be cut again. However, there is an equal chance that the Bank of England will have to prioritise on the risk of inflation rising further and may therefore leave rates on hold.
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