UK Interest Rate: 5.25%

UK Interest Rates Forecast: Further moderate cuts possible - large cuts unlikely

Reuters Poll: Economists Expect Further Cuts

A poll by Reuters of 54 economists found that 53/54 expect the Bank of England to cut interest rates to no more than 5% by June. The median forecast was for a further cut to 4.75% by September, after which rates might remain unchanged until March next year.

The financial markets have been expecting rates to fall to 4.5% by the end of 2008, but recent comments from Mervyn King, Governor of the Bank of England, suggest that smaller cuts are more likely as the MPC continue to focus on controlling inflation.

Interest Rates: An Underlying Plan?

Although inflation is being touted as the main reason for keeping interest rates (relatively) high - higher than the US or Europe, anyway, there may be a second reason, according to some analysts.

Felix Salmon, writing in the Market Movers blog this week, explained why he thinks inflation itself isn't the only reason our interest rates aren't coming down faster:

"Rather, I suspect that the Bank of England is quietly not at all unhappy that the housing-and-finance boom seems finally to have come to an end. It was always unsustainable, and while there's no pleasant way for any bubble to burst, a slow deflation, like we're seeing in the UK, is always preferable to a nasty crash."

Salmon also observed that if the worst does happen and panic sets in, the Bank of England has much more scope for an emergency cut in rates than either the European Central Bank or the US Federal Reserve.