Over recent months we have heard a lot about both soaring inflation levels and falling interest rates. Between August 2006 and July 2007 the nation saw interest rates rise five times, each time by 0.25%, taking the base rate up to 5.75%. However, between December of last year and April of this year the base rate was cut three times, again by 0.25% each time. This resulted in the base rate falling to 5% by April. However, since that time the base rate has remained at 5%, and growing concerns over the soaring level of inflation means that further base rate cuts could be off the card for the foreseeable future.

A number of experts have recently commented on both inflation levels and interest rates. Both issues are raising concerns, with inflation levels reportedly running at the fastest pace since 1997, and the economy showing signs of shrinking indicated by factors such as tumbling stock market, increased unemployment levels and job losses, a downturn in the housing sector, and more.

One economist from Global Insight said recently that the future was uncertain when it came to interest rates.

He said: ‘The overall impression is that the Bank of England is currently very much in “wait and see” mode’ and in no hurry to change interest rates, given the current major uncertainties surrounding both the growth and inflation outlooks. We believe it is most likely that interest rates will stay at 5.00% for many months to come, as very weak economic activity increasingly contains and then dilutes underlying inflationary pressures. Further out, we expect interest rates to be cut significantly in 2009 and to come down to 4.00%.’

An official from Investec recently said: ‘Short-term inflation prospects look ugly and the CPI measure could well exceed 4.5% this autumn. But we judge that this will not happen and that the inflation outlook in the medium-run will be largely governed by an economy close to recession later this year. We think the committee will try to ride the situation out for a few months and then cut rates early next year. But there is a growing chance that the faltering economy overrides the strength of short‑term inflation pressures and forces the MPC to press the emergency button and ease before the end of the year.’

Another official also commented on the situation, stating: ‘The minutes of the latest Bank of England meeting and Governor Mervyn King’s Mansion House speech were on the hawkish side, suggesting that rates are likely to remain on hold in 2008. That said, with growth slowing sharply and inflation likely to peak in the autumn, we still suspect that the risk is for a rate cut before year-end.’

In the meantime the decision as to whether to cut interest rates, keep them stable, or even increase them will continue to be a tough one for the central band and MPC members.

Recent Additions:

• House prices now more than 10% lower than last year
• First direct launches offset mortgage for those looking to remortgage
• Freeze on Mortgages Expected to Continue Until 2010
• Interest rates for August remain on hold
• Abbey takes huge slice of mortgage market

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