Interest Rates to Fall in 2008

Yesterday, the Bank of England kept interest rates constant at 5.75% for the fourth consecutive month. However, it looks increasingly likely that the base rate will fall in 2008, possibly to 5%.

Every three months the Bank publish an inflation report, which is a forecast for inflation over the next couple of years.

Despite recent factors causing cost push inflation (oil prices, fuel prices) the outlook for inflation is forecast to be benign. The Bank predict that CPI inflation will be close to the government’s target of 2% by 2009.

Other economic indicators also pointed to a slowdown in the growth of the economy. With slower growth, inflationary pressures will recede and this will enable cuts in interest rates. Evidence of a slowdown comes from:

  • Credit Crunch. – Due to shortage of global credit, banks are becoming more reluctant to lend mortgages. However, they are now being more strict in lending credit, even for small purchases. This article at Independent show some examples.
  • Borrowing costs increase – despite base rates staying the same. Due to shortgage of credit, banks have increased their standard variable rates. This reflects the increased difficulty of attracting funds.
  • surprise fall in retail sales in October
  • Falling House Prices. The Halifax have reported lower house prices.
  • Predictions of Share price falls (by Mervyn King)
  • Slowdown in US economy spreading to rest of economy
  • Strong Pound making exports less competitive.
By on November 16th, 2007