Inflation Scuppers Interest Rate Cuts
The Bank of England looks to have little control over the way interest rates go, as its decisions are driven by external factors, such as the credit crunch and inflation. With the latter on the rise a base rate cut doesn’t look possible until 2009.
In the middle of last year the popular forecast was for interest rates to keep rising; then came the credit crunch and the base rate went into reverse; early this year inflation started to creep upwards and base rates stalled; now inflation has taken a grip and the forecast is for interest rates to go back up again, and not come down again for a year or more.
Can the Bank of England really influence events or is it only able to react to wider global economic circumstances? The Governor, Mervyn King, has to write to the Government to explain why inflation is so high and what the Bank is going to do about it. Maybe a shrug would be his best answer.
With the base rate set to go back up again, hopes for a cut in mortgage interest rates have faded. And that is in spite of the fact that rising mortgages are becoming less tied to the Bank of England base rate – certainly when the latter comes down – and more dependent on the money market swap rate.
King reckons that the rate of inflation will stay high well into 2009, as the official Consumer price Index figure reached 3.3% yesterday –its highest level for 16 years. It is, King said, likely to go above 4% in the autumn. Most of the public could tell him that, for them, it is already way over these figures being discussed, as energy, fuel and food prices have rocketed in recent months.
Official figures show food prices to be 7.8% higher than a year ago. Such regulars as eggs have soared by 38.8%, butter by 31.9% and bread by 14.7%. Petrol is now 18.4% more than 12 months ago and electricity bills are 9.6% more expensive, with gas bills up by 7.1%.
Economy experts now say that the base rate will not drop from 5% for many months to come, yet it was only a few weeks ago that economists were saying interest rates would drop in the summer and the autumn.
