The interest rate cycle is closely related to the economic or trade cycle.
Interest rates are the main mechanism of influencing economic activity. For example, in the past few months retail activity in the UK has slowed down, therefore, many have been calling for interest rate cuts to stimulate domestic demand.
Since 1997, UK interest rates have been fairly steady, the interest rate cycle has been less volatile. However in the 1980s, under the Thatcher government the interest rate was much more volatile due to the economy being subject to periods of boom and bust.
Diagram of Interest Rates in the UK
Source: BBC website – Thatcher years in pictures
Note the two periods of very high interest rates in 1980 (17%) and 1990 (15%) were followed by recessions.
On both occassions interest rates were increased to reduce inflationary pressure. In 1990, interest rates were also increased to protect the value of the Pound Sterling in the Exchange Rate mechanism.
When the UK left the ERM in 1992, the Government were able to cut interest rates; this was necessary because the economy was in a recession. Interest rates feel to 5% in 1995.
Since 1995, average interest rates have been much lower – reaching an all time low of 3.5% just recently. UK interest rates increase to 5.75% in the summer of 2007 before starting to be cut in November 2007.
Forecasts for Interest Rates. Most people expect interest rate cuts in 2008. Predictions suggest interest rates will fall to 4.5% or lower – Interest rate predictions
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We as a UK importer and distributor are seeing price rises of 10-37% on steel and non ferrous based products from Chinese/Taiwanese suppliers. With the continuing fall of the Chinese RMB to the US$, suppliers are seeking further increases. We will have to pass on these costs in the next few months so surely many other importing companies around the world will do the same and thereby fuelling inflationary pressures dramatically. How will this affect the Bank of Englands decision to change interest rates when balancing the needs to curb inflation yet prevent a recession?
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