A rate rise in 2011 is still no certainty

SO WHEN will interest rates start to rise?

With the Bank of England having pumped in �200billion of quantitative easing to boost the money supply during the financial crisis – a necessary but nonetheless blunt instrument which it might reasonably have been thought would prove inflationary once economic recovery took hold – it is perhaps surprising that a tightening of monetary policy has not already begun.

Certainly there are those who argue that the process should have started, with inflation having remained well above the Government’s 2% target for many months and likely, as the Bank of England acknowledged in its latest quarterly report last week, to remain so for many months to come.

The report’s forecast that inflation will eventually fall back towards target includes an assumption that interest rates will rise in line with market expectations, which would imply an increase by the end of this year, probably in November once growth figures for the third quarter are published.

A rise in August cannot be ruled out but, after muted growth in the first quarter of 2011, which barely offset the decline seen during the snow-bound end to 2010, it seems unlikely that the second quarter will be so significantly better as to justify an increase in rates.

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However, a rise even in November is by no means a foregone conclusion. The bank’s inflation report again paints a gloomy picture from the perspective of the consumer, with household budgets likely to remain under pressure as high oil prices feed through into higher gas and electricity bills later this year.

Since pressure on disposable incomes and the external nature of inflationary pressure have been the major factors behind the base rate being left on hold at 0.5% for so long despite above target inflation, it is entirely possible that the case against an increase will remain equally as strong for the rest of this year and into 2012.

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The report’s assumption of a rise in rates within its inflation forecast recognises the reality that an increase will be necessary as the economic recovery becomes established, but that does not necessarily mean that it will happen this year.

Similarly, the report acknowledges the possibility that belt-tightening by consumers might have reached its peak ahead of the Government’s austerity measures taking full effect and that they might now start to spend a more freely.

So they might but, with many still taking advantage of the opportunity to pay down debt and no sign of higher prices feeding through into wage inflation, there is still every reason to think that consumer weakness may see any increase in interest rates postponed beyond the end of this year.

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