With the publication of the quarterly inflation report, Bank of England Governor Mervyn King confirmed that a further rise in interest rates to 5.75% is likely to occur later this summer, in an attempt to bring inflation back under control. He stated "The path of interest rates assumed in this projection anticipates a further rise in the bank rate,"

The inflation report confirmed that a rise in interest rates to 5.75% is required to meet the CPI target of 2% in two years time .

The Bank confirms the Market Oracles forecast for UK interest rates to hit 5.75% by September this year.

The next objective is to determine what follows 5.75% interest rates, for that key clues are whether the anticipated slump in the UK housing market transpires after the final flurry of summer activity wears off. If as expected the UK housing market goes into a protracted slump, then that will have the effect of pulling CPI inflation back on target to reach 2% in 2 years time and hence confirm a peak in UK interest rates at 5.75%. The situation for what interest rates will do over the next 2 years will become much clearer by September 2007.

Other clues to future trend in UK interest rates is the behavior of sterling relative to other currencies. The technical picture remains bullish, as the Pound has been in an uptrend since 2001 against the US Dollar targeting a rally to $2.10. Recent weakness has so far been insignificant in terms of the long-term trend.

Even if interest rates do peak at 5.75% in August or September 2007, sentiment for higher interest rates will remain for the rest of 2007, which will continue to leave the window open for sterling to target $2.10.

Notes

UK strong house price growth signals further rises in interest rates - March 07
UK Interest Rate forecast for 2007 - Bank of England to do battle with inflation - Dec 06
UK Interest Rates could rise to 5.75% in 2007 - Nov 06
Interest Rates Correction is Over - March 2006
UK Long-term Interest Rates Trend is still UP ! - Nov 2005

By Nadeem Walayat
(c) MarketOracle.co.uk 2007

The Market Oracle is a FREE Daily Financial Markets Forecasting & Analysis online publication. We present in-depth analysis from a range of experienced market analysts on their views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on market direction http://www.marketoracle.co.uk

This article maybe reproduced if reprinted in its entirety with links to http://www.marketoracle.co.uk

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2022 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.