Interest rates ready to fall

INTEREST rates have reached their peak and are likely to start falling now, thanks to an unofficial relaxation of inflationary targets by the Government, according to Roger Bootle, a leading City economist.

His forecast marks a sea-change in the sentiment sweeping through the markets, which have until now been anticipating higher interest rates for the rest of this year. Although many economists still believe there are upward pressures on base rates, opinion is swinging round to the view that rates may, at worst, remain at their current level of 6.25 per cent.

The change of attitude will deeply colour the markets' reaction to Wednesday's monthly meeting between Kenneth Clarke, the Chancellor, and Eddie George, governor of the Bank of England, when interest rates are expected to be held stable. At last month's meeting, Mr Clarke was harshly criticised for blocking a rate rise favoured by the Bank of England. This time, however, the City will support his view that interest rates do not need to alter.

Mr Bootle, chief economist at Midland Bank, believes that the next interest rate change will be downwards because the economy is now clearly weakening. "The overwhelming evidence of economic indicators in this country and abroad is that activity is slowing," he said.

As part of expansionary policies to counteract a slowdown, Mr Bootle forecasts tax cuts of pounds 4bn to be announced in November.

The other key factor improving the interest rate outlook is the more relaxed attitude to inflationary targets by Mr Clarke. The Government had set an upper limit for inflation of 2.5 per cent by next year. In a recent interview, however, Mr Clarke said that inflation at 3 per cent would be "not much short of a triumph when you look at previous British recoveries".

Mr Bootle believes that interest rates may start falling as early as this autumn and will be back down to 6 per cent or less by the next general election. That would mean a reduction in average mortgage rates of about 0.75 per cent from current levels.

The financial markets are beginning to share Mr Bootle's view. The short sterling futures contract is indicating that investors believe interest rates will not change over the next few months. Over the longer term, markets are indicating that they expect no change or a slight fall. This is a reversal from only a few months ago, when they were indicating rates as high as 9 per cent by the end of this year.

Mr Bootle's view of weakening economic activity in industrialised countries was strongly supported on Friday by much worse-than-expected US employment figures for May. US stocks and bond yields fell sharply on fears of a sharp economic slowdown.

But many City economists believe the evidence in the UK is still confusing. "The economic data is conflicting," said George Magnus, UK economist at SG Warburg. "There are some bad indicators but plenty of positive stuff, too. Earnings are rising, taxes are likely to fall, and exports are good, so the economic picture in the second half of this year ought to improve."

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Laura Trott with her gold
Commonwealth Games
Arts and Entertainment
Gal Gadot as Wonder Woman
film
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
Sport
France striker Loic Remy
sportThe QPR striker flew to Boston earlier in the week to complete deal
Extras
indybestSpice up your knife with our selection of delicious toppings
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Training/Learning and Development Coordinator -London

£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

.NET Software Developer (.NET, C#, ASP.NET, front-end)

£30000 - £45000 per annum: Harrington Starr: A Global Financial Service Organi...

C# Web developer (C#,MVC,ASP.NET,SQL)

£30000 - £40000 per annum + Bonus+Benefits+Package: Harrington Starr: C# Web d...

Day In a Page

A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
It's the best of British art... but not all is on display

It's the best of British art... but not all is on display

Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
Critic claims 'I was the inspiration for Blanche DuBois'

Critic claims 'I was the inspiration for Blanche DuBois'

Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
Sometimes it's hard to be a literary novelist

Sometimes it's hard to be a literary novelist

Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

The woman stepping down as chair of the Heritage Lottery Fund is worried