Will the UK raise interest rates?

Will the UK raise interest rates?

Will the UK raise interest rates?

Pressure mounts on the MPC as inflation continues to spiral out of control, now sitting at 4% - exactly double the BofE target at 2%. The credibility of the organisation is now coming into question as their remit is, very simply to control inflation. Mervyn King too has recently stated that it may be "many quarters before we raise rates" which further brings this issue to a forefrontas a cause for concern. Raising interest rates will naturally tackleand has astrong correlation to the strength of the native currency, with any hike we can expect Sterling strength. Why then has an organisation with a remit to control inflation not used the proven tool to tackle the problem despite it reaching alarming levels?

Recession. Recession. Recession.' Would be ex-PM Tony Blair's answer. Quite simply the country isstill struggling to its feet the UKs Q4 GDP figures were released at -0.5%. With this figure showing contraction it means that a double dip is potentially only one quarter awayand this has prompted some short term Sterling weakness. Certainly GDP figures for January (released tomorrow 25/2/2011)will give us an indication on how likely the UK is to re-enter recession. Although it is now more of a possibility than it was when we entered February if you are to hedge your bets then it is likely we will avoid the dreaded double dip (alliteration at its best).

If interest rates are raised then it may falter an economy struggling to recover, it certainly does not help the Housing market which is a principle reason the English are still not striding towards greener pastures. As a general rule the Housing industry is one that is looked toward to head an economy out of recession and raising rates would be turning a blind eye to the potential domino effect it could cause to the economy.

That said inflation is something that has to be addressed. However if you take a closer view then that these inflation figures have been, well, inflated by a large rise in commodity prices imported from overseas for instance oil and copper have both seen a huge rise in prices recently. This detracts from any impact a base rate rise would have, a point mooted by King (amongst other members of the MPC) and it is suggested that despite rumoured rate hikes this year that inflation is unlikely to return to levels under 2% until midway through 2012.

Personally I would concur that at least one rate hike is likely this year, but as the problem is exaggerated by circumstances outside the MPCs control the base rate may struggle to reach 1% as some expect. Interest rates typically have a very strong correlation to currency strength, so it does seem likely that the Pound will have a fairly bullish 2011 and potentially an even better 2012, this of course is assuming we do avoid the double dip.

If you have any questions on anything in the article my contact details are below.

Furthermore on a side note if you know of anyone with a Currency Requirement then send me a mail with details of phone number, email address and requested Currency Pair and I will enter you into a prize draw for a bottle of Laurent Perrier Rose!

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