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UK Interest Rates could rise to 5.75% in 2007

Interest-Rates / UK Interest Rates Nov 07, 2006 - 05:12 AM

By: Nadeem_Walayat

With this Thursdays BoE decision of a rise in interest rates to 5% a near certainty. There are clear signs that rates could carry on rising to much higher levels during 2007, due to rising inflation, fed by strong growth in the UK's Money Supply. The projection of 5.75% was first forecast by the Market Oracle in November 2005, with subsquent economic data confirming the trend in higher interest rates. Inflation as measured by CPI is currently running at 2.4% with RPI at 3.6%, well above the old cap of 3%, with little signs of abating despite the rate rises todate.

The spread between the base rate (4.75%) and RPI (3.6%), is currently at 1.3%, marginally higher than the low set in 2003 of 1.1%, which preceded a rise in interest rates from 3.5% to 4.75%. This took the spread to 2%, since that time, RPI has risen and interest rates have fallen to 4.5%. This puts the UK under similar interest rate hike pressures as during the start of the rate hikes back in 2003 and targets an interest rate rise to 5.75%.

For each 0.25% rate rise economic growth is likely to slow by 0.3%, thus a rise to 5.75% would imply a reduction in forecast GDP growth from the current 2.6% to 1.6%, which means that the UK is still likely to avoid a recession during 2007.

Other factors influencing rate rises towards 5.75% during 2007 are -

House Prices - Against BoE expectations, House prices have started to accelerate higher, and or now on target to achieve year on year growth of 10%, this despite the rate rises since 2003. The growth brings average house prices up to£169,623. With data from the BoE showing the number of mortgage approvals -- seen as a gauge of future demand, rising to 126,000 in September, which is the highest level of activity in over two and a half years.

UK Money Supply - The BoE data shows that M4 money, a broad measure of money supply, is rising at its fastest rate in 16 years on which will ensure higher inflation over the medium term. M4 rose at an annualised rate of 14.5%, the biggest rise since September 1990.

The Money Markets - are already looking to the next rate rise after this months, with the implied rate for March 2007 at 5.42 percent, which is up from 5.19 percent at the start of September 06.

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Comments

RK1001 09.05.07, 01:32

Your interest rate forecast seems to be coming true. Any update on what to expect after UK rates hit 5.75% ? i.e. during the rest of the year ?

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