The next step towards 3.5%

The dilemma facing the Monetary Policy Committee (MPC) has not got any easier to resolve. Inflation expectations have risen further and yet borrowers have started to suffer even more at the hands of the credit crunch. We think that the renewed problems in the money markets, together with the aggressive tightening of credit supply by mortgage lenders, will carry greater weight at this month’s policy discussion. Not only do interest rates now look likely to fall in April, but we now expect them to fall to 4% by the end of 2008 and 3.5% in 2009.