Only small cuts in interest rates predicted

by Richard Kilner

Story link: Only small cuts in interest rates predicted

The forecasts of severe interest rate cuts appear to be proved wrong, as the Bank of England today indicated that rates would not be slashed.

However, a cut remains likely in the near future.

The primary reason for only moderate cuts in interest rate is a predicted inflation level far above the bank’s target, should interest rates fall to 4.5% by the year’s end.

Interest rates currently stand at 5.25%, and it is projected that if they remain unchanged inflation would fall beneath the 2% target.

Prior to the report’s publication financial markets has presumed rates would hit 4.5% through a trio of quarter point cuts during the year.

However, mounting inflation concerns fuelled by soaring fuel and food costs have reduced the likelihood of three such cuts.

With increasing inflation and growth predicted to fall from 3% at present to 2% by the year’s end, it is expected to be a difficult year for the UK economy.

The situation is not helped by the budget deficit, the largest in the G7, allowing for GDP size.

The Bank of England predicts that by the end of 2009, growth will have increased moderately to 2.5%.