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Interest rates and economic future

The situation with the UK economy is hard to assess at present, as we stand at a point where growth has been continued over recent years in most areas, with house prices and consumer spending seeing considerable increases. Some experts argue that the growth cannot continue, and during the past year things have slowed considerably.

During the first half of 2005 the pressure on the Monetary Policy Committee (MPC) to reduce interest rates from retailers began to increase significantly as growth in consumer spending began to recede. In the August meeting of the MPC, it was decided to cut rates a quarter percent, taking them to the 4.5% that they currently stand at. Whether this has spurred consumer spending is a moot point at present, with the retail sector still facing hard times.

One thing that the rate cut does appear to have affected is the housing market, which is seeing an upturn of late, especially in the remortgaging area. With vendors reducing their asking prices as well, the housing market in general has been given respite from the decline that it had been experiencing.

With the housing market stable, and with consumer spending still slowing, the MPC will have a tough time in deciding what level the base rates should be in coming months, especially as inflation is rising above target thanks mainly because of increasing energy costs.

Historically, the MPC approaches the rate setting with caution, and it is likely that it will adopt a ‘wait and see’ approach for a while at least, leaving rates unchanged while it assesses the general financial situation and sees if the higher than expected rises in inflation are a short-term issue.