Friday, October 5, 2007

Interest Rate Forecast

Yesterday, the Bank of England kept UK base Rates at 5.75%. Although they released no statement it is believed that they are still uncertain about future inflation prospects. They will probably say that it is too early to judge the impact of the financial crisis. Economists feel that the Bank is in rush to cut interest rates, despite several factors suggesing the interest cycle is about to turn

Factors Which will Influence Future Interest Rates

  • House prices are starting to fall. The Halifax reported a 0.6% fall last month. Annual house price inflation is still in double figures. But, if this monthly fall is not a one off it will significantly change the state of the economy and make future inflation
  • The Cost of loans is rising. Especially cost of loans to non - financial corporates. This is a result of increased risk associated with loans and the malfunctioning credit market.
  • Slowdown in Consumer Spending. - Retailers have been reporting slower sales.
  • Strong Pound and Euro - The Pound and Euro are strong against its main trading partners, although, it is not certain how much of a problem this is going to be.
  • US slowdown - Will it spread to Europe and the UK?
  • Will Cost Push inflation rise as a result of increased commodity prices?
  • At the moment UK inflation is close to the Bank's CPI inflation target of 2%
  • EU interest rates were also kept steady at 4%

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