With the publication of the quarterly inflation report, Bank of England Governor Mervyn King confirmed that a further rise in interest rates to 5.75% is likely to occur later this summer, in an attempt to bring inflation back under control. He stated "The path of interest rates assumed in this projection anticipates a further rise in the bank rate,"

The inflation report confirmed that a rise in interest rates to 5.75% is required to meet the CPI target of 2% in two years time .

The Bank confirms the Market Oracles forecast for UK interest rates to hit 5.75% by September this year.

The next objective is to determine what follows 5.75% interest rates, for that key clues are whether the anticipated slump in the UK housing market transpires after the final flurry of summer activity wears off. If as expected the UK housing market goes into a protracted slump, then that will have the effect of pulling CPI inflation back on target to reach 2% in 2 years time and hence confirm a peak in UK interest rates at 5.75%. The situation for what interest rates will do over the next 2 years will become much clearer by September 2007.

Other clues to future trend in UK interest rates is the behavior of sterling relative to other currencies. The technical picture remains bullish, as the Pound has been in an uptrend since 2001 against the US Dollar targeting a rally to $2.10. Recent weakness has so far been insignificant in terms of the long-term trend.

Even if interest rates do peak at 5.75% in August or September 2007, sentiment for higher interest rates will remain for the rest of 2007, which will continue to leave the window open for sterling to target $2.10.

Notes

UK strong house price growth signals further rises in interest rates - March 07
UK Interest Rate forecast for 2007 - Bank of England to do battle with inflation - Dec 06
UK Interest Rates could rise to 5.75% in 2007 - Nov 06
Interest Rates Correction is Over - March 2006
UK Long-term Interest Rates Trend is still UP ! - Nov 2005

By Nadeem Walayat
(c) MarketOracle.co.uk 2007

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