|When will UK interest rates increase- (10.03.02)|
I expect everyone realises that UK interest rates will increase during 2002, it just being a question of when. Real interest rates (interest rates less inflation) are currently 2.7% compared to 2.8% a year ago so this would appear to suggest that there may be no real need for interest rates to go up. If you look at money supply and exchange rates, two other possible indicators of interest rate movements you will see little evidence for a need to increase rates just yet. Therefor I would expect to see the first interest rate increase of 0.25% in May or June with another in September.
Inflation forecasts for this year are around 2% with 2.4% for 2003. Two year government bond rates are at 4.75%. This would appear to suggest that real interest rates will fall to around 2% by the end of the year if interest rates were not to move. This would appear to be too close to maintain the 1.9% GDP growth expected in 2002. Therefore expect to see interest rates increase to 4.5% or 4.75% by the end of 2002. As for 2003, if growth does reach 2.9% as predicted and inflation reaches close to the 2.5% target, interest rates as high as 5.5% are likely by the end of 2003 just to keep this growth sustainable with inflation under control.