Keith Barrett

Where next for UK interest rates?

After a long period of low interest rates, 2007 has seen the Bank of England raise the base rate on a number of occasions. With some analysts predicting that the UK economy may slow considerably in 2008, where are interest rates heading?

At the beginning of the year much of the talk seemed to surround the booming housing market. Many financial experts were concerned that the housing market was contributing to rising inflation.

With house prices having increased steadily at a rate of more than 10% per year, many Britons had never felt so rich. The only problem on the horizon seemed to be that much of this property inflation had arrived on the back of enormous amounts of borrowing.

The Bank's decision to increase interest rates seemed to lead to a cooling down in the housing market, although the signals were not always clear. Leading UK mortgage lenders often seem to produce wildly differing figures on the supposed state of the market.

Any effects on inflation were also uncertain, with fluctuations in oil and food prices causing particular problems.

September saw the crisis at Northern Rock, with consumers suddenly becoming aware of the sub-prime crisis that had enveloped the US property market.

With such a leading mortgage lender in crisis, the UK economy seems to have taken a blow to confidence. Anecdotal evidence suggests that the housing market has reached a plateau, with falls being seen in some areas.

All of this would seem to suggest that a substantial fall in interest rates may be on the way, but the Bank of England has a difficult job ahead.

With prices rising in the supermarkets, the danger of inflation hovers on the horizon.

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