Experts give their views on interest rates
February 20, 2008
In December of last year the Bank of England cut interest rates by 0.25%, which was the first rate cut in two years, and came after a series of five 0.25% hikes between August 2006 and July 2007. Earlier this month the Bank of England cut interest rates by a further 0.25% taking the base rate to 5.25%, which came as a relief to many struggling homeowners on variable rate mortgages.
Many analysts and economists have been speculating about what will happen with interest rates next. Most had predicted that the rate would come down in February, but the decision over interest rates has become a difficult one for the Bank of England, as it has to balance rising inflation with a slowing economy in order to determine whether to reduce rates further. Most are still predicting, however, that there could be another couple of rate cuts over the course of this year.
One industry official stated: ‘Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation.’
An official from Global Insight said: ‘The Bank is likely to continue to cut interest rates gradually as it carries out a difficult balancing act of trying to support growth while containing underlying inflation pressures. We currently forecast interest rates to fall to 4.5% by the end of 2008 and to 4% in the first half of 2009. This is based on our assumption that the UK will avoid recession, but will see extended below-trend growth. Specifically, we forecast GDP growth to be limited to 1.8% in both 2008 and 2009, which would be the equal weakest performance since 1992. However, with the downside risks to the UK economy mounting, there is clearly a very real possibility that interest rates will fall faster than this.’
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