Interest rates set to rise as economy recovers

Interest rates will start to rise sooner than expected after official figures showed the economy growing at its fastest rate for a decade, economists have said.
By Andrew Porter and Philip Aldrick
Published: 10:16PM BST 26 Oct 2010


Growth over the past six months reached 2 per cent, the fastest pace of expansion over two consecutive quarters since 2000, according to the Office for National Statistics.

The economy received a further significant boost when Standard & Poor's, the ratings agency, revised its outlook on Britain from negative to stable and confirmed the country's AAA credit rating


Related Articles
Analysis: collective sigh of relief from Cabinet
Osborne's recovery plan gets double boost
British economy grows twice as fast as predicted
Prospects of more QE fade as growth comes in above forecast
Sterling rises sharply on surprise GDP data, upbeat S&P
Chancellor welcomes 'double dose' The Chancellor welcomed both as a "vote of confidence" in the Coalition's economic policies in the week following the Comprehensive Spending Review. Economists warned that the good news could be tempered by interest rates rising earlier than expected.

Andrew Sentance, a member of the Bank of England's monetary policy committee, said he was in favour of lifting interest rates.

"There is a bit of a mismatch between what's happening with inflation and growth, which we have heard about today, and the level of interest rates," he said.

"I am in favour of gradually moving interest rates up from their very low level which I think can be done without disrupting business or consumer confidence."

Interest rates have been at historically low levels since the credit crisis took hold, with the Bank of England keeping rates at 0.5 per cent since March last year. It had been expected there would be little change before the end of next year, but on the back of yesterday's strong growth figures some traders were predicting two rate rises before then, with a base rate of at least
1 per cent by the end of 2011.

A home owner with a typical £150,000 mortgage, assuming a variable rate of 4 per cent, would see their monthly payments increase from about £790 to about £830 if rates rose by 0.5 per cent. Banks would also increase the cost of fixed-rate deals. However, it would be good news for savers. The majority of accounts currently on the market fail to offer customers a real return on investment.

Before the publication of yesterday's figures, the Coalition had been braced for a significant drop in growth from the second-quarter rate of 1.2 per cent. But instead of the 0.4 per cent growth predicted by many commentators, gross domestic product (GDP) grew by 0.8 per between July and September, the ONS said.

The Treasury claimed that the special circumstances of the second-quarter figures – an economic rebound after a particularly cold winter – meant that the latest data did not represent a slowing of the economy.

Last week, Mr Osborne announced cuts of £81 billion designed to restore some credibility to Britain's economy, a decision that appeared to have been endorsed yesterday by Standard & Poor's.

Welcoming what he called a "double dose of good news" for the economy, the Chancellor said: "What you see today, in an uncertain global economic environment, is Britain growing, growing strongly; the strongest growth we have seen in this part of the year for a decade, and also our country's credit rating being secured.

"That is a big vote of confidence in the UK and a vote of confidence in the Coalition Government's economic policies. I think that will underpin confidence in the recovery going forward." No10 believes the growth figures are a clear sign that Britain has escaped a double-dip recession.

Economists pointed out that construction, which contributed 0.2 points of the quarterly growth, has been underpinned by government spending.

The pound surged after the figures were announced.

Mr Osborne added: “This gives me confidence that although global economic conditions remain choppy, a steady recovery is under way.”

Traders said the market had been expecting one interest rate rise next year but that two rate rises were now expected.

Business gave a cautious welcome to the growth figures, but there were warnings about the looming impact of the cuts and VAT rise in the New Year. David Kern, the chief economist at the British Chambers of Commerce, said: “We must not forget that we have not yet seen the impact of the deficit cutting measures.” In a vote of confidence in the economy, JP Morgan Chase is on the verge of agreeing to go ahead with a £1 billion office development at Canary Wharf that it had been threatening to scrap.

Alan Johnson, the shadow chancellor, claimed that the figures showed that the momentum “remains from Labour’s support for the economy”.

He added: “The risk going forward is that the Government has a plan to cut one million jobs, but no plan to support the private sector in replacing them.”

__________________

Al Cancellor se le pondra dura con la noticia, pero a los pepitos ingleses se les han arrugado los eggs.

__________________

Hasta que no lo vea no lo creeré,pero si en 2011 se empiezan a subir tipos en la mayoría de paises excepto USA,me veré obligado a descorchar una buena botella de vino.

__________________