Interest trough- (19.10.03)

The message from the Bank of England appears to be not only that interest rates have troughed at 3.5%, but sustained increases may be required. In's opinion, we are unlikely to see significant or quick increases in interest rates, in the same way that the likelihood of interest rates below 3% that were forecast only two months ago were unlikely.

The reason for this change is that growth suddenly appears to be not the issue it was two months ago. This is fundamentally an issue of statistical measurement rather than any real change in economic situation. The low GDP growth originally reported by the ONS did not sound intuitively correct when compared to business survey evidence and the employment and wage inflation balance. Similarly extrapolating high growth forward is not likely and the inflation forecast is still benign. Remember that deflation was considered a possibility by some commentators not too long ago.

In the same way that we see inflation, growth, wages and employment ticking along quietly in the UK economy, interest rates are unlikely to increase rapidly or require large increases. This may mean interest rates increasing to 4.5% by the end of 2004 and 5% by the end of 2005, but this is hardly likely to have a dramatic effect on personal finances even if they do reach this level.