British interest rates to increase

INTEREST rates in Britain are set to rise in June, according to Bank of Ireland Global Markets chief economist Dan McLaughlin.

He said the conditions are in place for British interest rates to rise with the Monetary Policy Committee (MPC) likely to increase rates in June. He made the prediction in this month’s Bank of Ireland Global Markets Economic Bulletin. The Bulletin provides a quarterly analysis of the outlook for currency and interest rates in the US, Britain, and eurozone.

Dr McLaughlin said the case for higher rates rests on the belief that the British economy is set to grow at or above its trend rate for the next few years putting further pressure on capacity and leading to higher inflation. “The Bank of England’s forecasts for growth and inflation, outlined in the February Inflation Report, projects a gradual rise in inflation over the next two years until it exceeds the 2% target in early 2007. This can be seen as justification for further monetary tightening. The majority view of the MPC to date has been to focus on the downward risks to these forecasts which resulted in a heavy majority favouring unchanged rates in March and April.”

Inflation has been higher than expected in recent months with March’s 1.9% the latest in a series of upward surprises. The housing market has also stabilised presenting the MPC with a difficult decision in May.

“The MPC has an unusual presentational difficulty in May - unless the Committee downgrades its growth projection, forecast inflation is now likely to exceed the 2% target much earlier than previously thought.”