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Monday, August 23, 2010

8% Interest Rates?

There has been some "fevered" speculation in the media, based on a forecast from Andrew Lilico chief economist at the Policy Exchange think tank, that UK interest rates may hit 8% within the next two years.

Evidently the summer "silly season" for reporting is still with us.

Aside from the fact that economic predictions are as about as reliable as the UK weather forecasts, I personally do not see this scenario happening.

The theory is that the UK will enter a period of boom, that will in fact run out of control, thus necessitating the Bank of England to aggressively raise rates in order to kill off the inflation beast.

Given the fact that housing market is currently running out of steam, and that the government is going to cut public spending (and by definition public sector jobs) extremely aggressively, an out of control boom in just two years is fantasy.

Those savers who have been dreaming of such a fantasy coming true should also bear in mind that the banks most certainly will not be paying 8% rates to savers in two years, even if the fantasy of 8% interest rates comes true.

For why?

Banks never pass on full rate changes to savers, as they need to take their cut on the margin between the rates they use for lending and saving.

As noted, this is a fantasy story whipped up by the media during the traditional "real news drought" of the "silly season".

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