Have interest rates peaked?

Has the interest rate tide turned? Has the Bank of England base rate peaked? Experts in the City are revising their interest rate forecasts after the Bank of England’s statement that accompanied last week’s rate decision which was to hold. The statement contained a warning that the impact of recent global market turmoil on the wider economy was uncertain. Meanwhile the IMF has said that global growth could slow.

Citigroup and Royal Bank of Scotland were two banks saying that the Monetary Policy Committee’s next move might be to cut rates after they were kept at 5.75% last week.

Recent surveys indicate that 80% of economists believe that rates have peaked for the year, and on the futures markets, traders are building in cuts for 2008.

According to Geoffrey Dicks of RBS, the case for lower rates was clear, and his forecast is for rates to be cut to 4.75% in 2008. The news of lower rates to come will be welcome news for beleaguered home owners in the UK, who are still struggling with the impact of five rate rises since August 2006.

The Bank issued a statement along with the rate announcement for only the third time since 1997 when it gained independence in decision-making from the government. This has caused economists to re-think their forecasts. Before the turbulence that has affected market since the middle of August, the popular prediction was for one more quarter point rate rise in 2007, with rates peaking at 6%, possibly in September or October, before beginning to come down again in 2008.

The European Central Bank also kept rates unchanged despite saying that it would have to increase them to keep inflation in check. In America the Federal Reserve is being encouraged to cut rates.

The IMF is cutting its forecasts for growth in both Europe and the US. Despite this apparent good news on rates, experts cautioned that poor harvests after the summer rains could push up food prices, sustaining inflationary pressures.

According to the Bank of England overall growth ‘remains solid’, while the National Institute of Economic and Social Research estimates UK growth eased only slightly in August to 0.7% from 0.8%.