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Wednesday, April 18, 2007

Interest Rates Set To Rise

Yesterday's shock rise in inflation to 3.1% has sent a warning signal to the financial markets that interest rates are sure to rise, in order to try to tame the inflationary tiger.

The rise in inflation forced Mervyn King, Governor of The Bank of England, to write a letter of explanation to Gordon Brown, as its rate was more than 1% higher than the 2% target.

This was the first such letter in almost 10 years.

Mr King blamed the sustained rise in inflation partly on sharp increases in food, electricity and gas prices over the past year, but also on businesses discovering a greater degree of pricing power as the economy continued to grow.

Sterling broke the $2 barrier, for the first time since 1992, in anticipation of the rise in interest rates.

However, before savers rush to celebrate in anticipation of seeing their meagre returns on savings rise; they should be aware that banks are very happy to pass on interest rate rises to borrowers, but are remarkably recalcitrant when passing on benefits to savers.

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