The slower rates are cut, the further they will fall (Feb-08)

The markets are increasingly coming round to our view that the slower the MPC cuts interest rates, the further interest rates might eventually have to fall. While the markets’ expectations for where interest rates will be in June have remained broadly stable over the last month, their expectations for where rates will be in June next year have fallen sharply. With inflation worries likely to increase over the coming months, we think that this move has further to go. We still think that interest rates will eventually fall to 4%, but they are unlikely to get there until sometime next year.