Future of Interest Rates in the UK

The latest date from the Office of national statistics shows that prices rose less than expected in the previous month. The CPI measure of inflation remained at 2.4%. The RPI (which includes housing costs) rose to 3.7%. However this was less than expected and in the Bank’s latest inflation report they reduced their inflation forecasts for next year to “around 2%” for the middle of next year.

The reasons for offering a lower inflation forecast is due to a number of reasons. Firstly oil prices have fallen,by 23% since August, due to increased supply from OPEC. This feeds through into lower transport costs. Also Unemployment continues to edge up, it is now 1.7 million up by 27,000 on the previous month. With rising unemployment levels it is likely that wage rises will be moderated. However the Bank did mention a note of caution. They said with regard to the labour market it is hard to predict future wage inflation because of unreliable data collection. For example they mention that it is difficult to calculate how many eastern European workers are entering the country. If there are more migrants than measured it will help to keep wage inflation low.

However despite difficulties with some statistic many economists are now predicting the UK economic cycle has peaked and the future trend of interest rates may be downward.

However there is still the possibility interest rates may continue to rise in the future. Firstly CPI inflation is still forecast to rise to 2.7% in the next couple of months. Also the levels of borrowing continue to reach all time highs. This is illustrated through the rapid growth in M4 (broad measure of inflation.) Although money supply is often an unreliable guide to inflation there is evidence that money supply growth of 14% may cause inflationary pressures in the future. With recent talk of 125% mortgages the Bank’s governor Mr King said that
“Some people had taken on far more credit than it was ever plausible to repay”

He went on to say it was a real social problem but not one that would directly affect interest decisions.
In addition to high levels of consumer borrowing the ever resilient housing market still provides ammunition for inflation hawks. With house prices continue to rise this could be a continued source of higher consumer spending and possibly inflation.

Overall the report is good news for those home owners who are worried about rapidly rising interest rates. The most likely scenario is only a very small future rise in interest rates.