Fewer interest rate cuts than predicted
by Kay Murchie
There has been a lot of speculation lately about interest rates with many analysts predicting further interest rate cuts will take place this year.
Earlier this week, Capital Economics said with inflation worries likely to increase over the next few months, interest rates have further to go. The company added that interest rates will ultimately fall to 4%, but they are unlikely to get there until sometime next year.
However, yesterday, the Bank of England warned that further cuts in interest rates are limited as it struggles to control rising inflation.
The Bank of England’s Governor, Mervyn King, predicted that UK growth would slow sharply to less than 2% by the end of this year, from about 3% currently.
However, Mr King also said he expects inflation to remain above the Government’s target of 2%, and forecast it could rise as high as 3%. This will result in few interest rate cuts than analysts are predicting.
Jonathan Loynes at Capital Economics said the Bank of England’s February Inflation Report has given a pretty strong signal that, for now at least, the Monetary Policy Committee does not expect to cut interest rates as far and as fast as the markets currently anticipate.
While David Brown, a chief economist at Bear Stearns, said the message the Bank would like to get across to the market is that there is only room for moderate easing interest rate cuts ahead, but the fundamentals say otherwise.
Mervyn King said the Bank faced ‘a difficult balancing act’ to bring inflation back under control at a time of slowing economic-growth. The near-term outlook is one of inflation rising sharply alongside a marked slowing in growth, added Mr King.
Last week, the Bank of England cut interest rates from 5.5% to 5.25% in an effort to prevent a major slowdown in the economy.
Earlier this week, the Swedish central bank actually increased interest rates because of its concerns about inflation in the country.
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