Economists give views on where interest rates will go next

There was a sigh of relief across the UK earlier this week when the Bank of England announced that interest rates had been cut by 0.25% from 5.75% to 5.5%.

There are now mixed predictions with regards to what will happen with the interest rate next, with some predicting that 2008 will see another one or two interest rate cuts and others believing that the interest rate could fall as low as 4% in 2008. Financial experts from This is Money interviewed some economists to get their views.

An official from Investec stated: ‘Evidently the MPC is taking much more note of recent signs of a slowdown in the economy and its fears over the possible effects of the credit squeeze have begun to crystallize. The question obviously now is whether rates come down again and if so how quickly. The outlook is very uncertain. We are pencilling two further 25 basis-point cuts over the first half of next year.’

Roger Bootle from Deloitte and Touche stated: ‘Today’s decision by the MPC to cut interest rates from 5.75% to 5.5% is the first step in a prolonged period of monetary easing that could see rates fall very sharply. I previously thought that rates would drop to 5%, but I now think that they could eventually be cut all the way to 4%. Inflation is likely to rise further in the coming months. However, the rise in interbank interest rates means that the risk of a very sharp and prolonged economic downturn is growing by the day.’

A spokesman from Bear Stearns said: ‘We expect another cut in January, with rates to target 5% by the second quarter. UK rates should be at 4.5% by the end of 2008, possibly even lower if the downturn is more severe. This has been a cut to alleviate the credit crunch and provide a rescue remedy for growth. Lower rates should help to put a prop under the UK housing market.’

Tom Smith
10t December 2007

King advised Darling not to lend to Lloyds

The Governor of the Bank of England Mervyn King has spoken out about his advice to the Chancellor of the Exchequer with regards to a loan request from banking giant Lloyds TSB.

The high street bank had approached the Bank of England for a loan to the tune of £30 billion in order to fund the takeover of Northern Rock. However, the governor advised the chancellor not to authorize the loan, which Lloyds wanted to take out over two years at competitive rates.

According to Mr King he told Darling that the Bank of England should not be providing loans to a company in order to allow the takeover of another company.

Speaking on Radio 4 Mr King stated: “I said to the chancellor: ‘This is not something which a central bank can do. They don’t normally finance takeovers by one company for another, let alone to the tune of £30bn, which is rather a large amount of money’.”

When speaking on Radio 4 Mr King also added that it could take months before banks get back to normal following the effects of the credit crunch.

He stated: “I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we’re going in the right direction.”

He also added: “There is always, in a period like this, the possibility that a shock from outside the UK, one from the world economy, might create further fragilities, but to some extent there are always risks, there are always fragilities. What I would say is that the situation now is, in my view, different from that in August, though it’s not without risk.”

Tom Smith
15th November 2007