Investors gamble on interest rates rising

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City analysts have been predicting interest rate falls to 4.5% by the end of 2008. However, they are now gambling that rates will have to increase from the current level of 5% to manage spiralling inflation.

City economists said that at the very best, all hopes of an interest rate cut this year have now been ‘snuffed out’.

The reversal in predictions follows figures from the Bank of England which show that approximately 3,000 homeowners in London are in negative equity (where their mortgage is worth more than their home).

The City is suggesting that at least 2, maybe even 3 quarter-point base rate increases are likely.

The market is acting on a feeling rather than detailed analysis but economists are concerned that this gamble on the worst case scenario may turn out to be true.

Jonathan Loynes, chief European economist at forecaster Capital Economics, said a rise in rates would make a full-blown recession much more likely. He added that the markets may well be right in expecting the next move in interest rates to be up. But they have not yet grasped the likely consequences of this for the economy.

Since December, the Bank of England have cut interest rates 3 times.

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