The great base rate dilemma of 1997

Article Abstract:

UK interest rates are likely to rise in 1997, but there is disagreement as to how far they will rise, and what will happen to inflation. Charterhouse's Richard Jeffrey sees inflation nearing 4% in 2nd half 1997, with interest rates rising to a possible 8.5%. Goldman Sachs' David Walton sees inflation likely to drop due to a drop in the cost of imports with a rise in the valueof pound sterling. A drop in unemployment and a rise in real wages could push up inflation, argues Kevin Gardiner from Morgan Stanley, who sees inflation as likely to rise.

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The costs of the Ken and Eddie show

Article Abstract:

Yields for UK government securities (gilts) are some 3.6% higher due to inflation expectations above official predictions. The government may be tempted to keep interest rates relatively low since the gains of low rates are short-term and the costs are long-term. Lars Svensson, an economist from Stockhold University, argues that the government could target forecast inflation which would show a real commitment toward inflation control. This would not eradicate the problem since accurate inflation forecasts are difficult to obtain.

Government securities

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UK: rise wrong

Article Abstract:

UK inflation could drop to less than 2.5% in 1997, according to HSBC Markets, which does not see a need for higher interest rates. Input prices for manufacturing have dropped by 2.9% in 1996 compared with 1995, output price inflation is 0.9% and commodity prices are soft except for petroleum. House prices are not rising so rapidly and more houses are likely to be put on the market. Capacity constraints are not likely to affect economic growth, and the government should have delayed interest rate rises.

Economic policy

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