Interest Rates

As an independent financial adviser I talk to clients every day about various issues surrounding their financial planning needs. One subject that invariably crops up in the conversation is interest rates and when do I think they will rise?
One aspect of my job is to attend seminars given by fund managers, economists and other ‘financial experts’. Invariably the hot topic in the question and answer session is interest rates and when do you think they will rise?
A couple of months ago the common perception was that rates would have to rise in order to combat UK inflation, which continues to be far in excess of the Bank of England’s target of 2%. However, with the economy growing at a sluggish 0.2% for the second quarter of this year*, it now seems unlikely that the Bank of England will raise rates due to the fear of stifling any recovery and possibly pushing the UK back into recession. *Source: Office for National Statistics.
When control of UK interest rates was taken out of the hands of government and given to the independent Bank of England, the Bank’s remit was to use interest rates to keep UK inflation under control. Therefore, Mervyn King seems to be stuck between a rock and hard place, in that by using interest rates to keep inflation in check, he risks damaging any recovery of the UK economy. It would seem that along with his colleagues on the monetary policy committee (MPC), he has decided to let inflation take its course and protect the fragile shoots of economic recovery.
Not all experts agree with Mr King’s plans however. DeAnne Julius, a former member of the MPC, predicted in June that rates would start to rise by November this year, possibly by as much as half a percent, however, the money markets appear to be taking the view that rate rises are unlikely this year due to the weak economic data published recently.
I recently attended a meeting with Keith Wade, Chief Economist with Schroder Investment Limited. Keith’s view was that interest rates would not increase until at least March 2012, with rates possibly reaching 1.5% by the end of 2012, with no major reduction in UK inflation before the end of 2013.
The European Central Bank (ECB) has recently raised interest rates in the Eurozone, mainly to try to control inflation in the major European economies, namely Germany.
So in answer to one of the most often asked questions in the financial world, the answer has to be – I don’t know. If I was really pressed for an answer then I would tend to agree with Keith Wade and say don’t expect any rise this year – but then again we could both be wrong!

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