Barclays Predicts Rate Holds

There will be no change to the base rate of interest until early next year, Barclays Capital said today.

Two trends, rising prices and falling growth, are currently afflicting the economy: the government's benchmark inflation rate stands at 3.3 per cent, 1.3 per cent above target, while GDP growth has decreased from 0.6 to 0.4 per cent over the past two quarters measured. According to Barclays, these inflationary pressures will effectively cancel out the ongoing economic slowdown - leading to months of rate holds.

The Bank of England's nine-member Monetary Policy Committee (MPC), the body which sets the rate, is therefore facing a dilemma. An economic slowdown generally leads to rate cuts, which makes credit cheaper and encourages consumers to spend more. However, rising inflation also leads to rate rises, with banks looking to counteract the erosion to the value of loans which increasing prices cause.

Therefore, the MPC's difficult decision is over whether to raise rates - and potentially tip the economy into negative growth or recession - or administer cuts and exacerbate inflation still further.

Simon Hayes, senior UK economist at Barclays Capital, said: "I think the most likely outcome is that they [interest rates] will be kept on hold until early next year and then we will see some cuts through the middle of next year.

"It's going to be very dependent on how the inflation and growth data play out. I think it's a very precarious situation…I think, on balance , they will end up keeping rates on hold as we see inflation rise and growth weaken."

Barclays' comments come ahead of the Bank's monthly interest rate decision, which will be announced next week.
 

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