What’s in store for interest rates

Interest rates have been dominating the financial headlines for the past two years. Concerns over rising inflation saw the interest rate rise five times between August 2006 and July 2007, each time by 0.25%, taking the base rate to 5.75% by July of last year.

This then remained static until December of 2007, leaving many homeowners struggling with repayments on variable rate mortgages.

In December the base rate was cut by 0.25%, taking it down to 5.5%, and whilst it remained on hold in January, the Bank of England cut the rate again by another 0.25% this month, taking the base rate to 5.25%.

Many experts are predicting that there will be another two interest rate cuts this year, with a 50% chance that there will be a further cut in March.

However, the Bank of England is having to consider rising inflation as well as a slowdown in the economy, and according to a recent report from the governor of the Bank of England, Mervyn King, interest rates are unlikely to fall as quickly or by as much as many economists have predicted.

One industry professional stated:

‘Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation.’