When Will Interest Rates Increase?

Readers Question: when will the base rate of interest rise again to around 4%?

I would say unlikely before mid 2010.

The Recession is proving deeper than initially thought. Recent evidence from industrial output shows that output has fallen by much more than feared.

GDP is likely to fall sharply in Q4; and the recession is likely to continue into 2009. This sharp slowdown could lead interest rates being cut close to 0%.

Towards the end of 2009, it is hoped the rate cuts and tax cuts will finally kickstart the economy and growth will return. As growth returns inflation could pick up and this could lead to a sharper rise in interest rates than many might imagine.

The reason is that at the moment, cutting rates is not proving very effective, so the Bank of England is cutting rates very aggressively. When the economy recovers growth and we see the return of demand pull factors, we could soon see interest rates increase to 4%. However, it is hard to see this happening in 2009.

The difficulty is knowing when this normal growth pattern will resume. This recession is unlike previous recessions, because one of its main causes is a global credit crunch. People aren’t quite sure how much more bad news there is around the corner. The concern is that rising unemployment could lead to more repossessions and more bank losses.

It is also worth bearing in mind the example of Japan, who due to deflation have not had interest rates above 1% for a over a decade.

I think deflation is unlikely in the UK, the MPC have promised to avoid deflation. But, anything is possible.