A fairytale ending in 2008 regarding UK interest rates just doesn’t seem possible. How – you may ask is this possible - especially after interest rates continue to fall? Another cut of 1.5% in November alone was historically significant. Yet thanks to a steady rise in unemployment among other things – The outlook for the UK economy and interest rates in general remains in a near comatose state.

The bigger issue is that on the surface lower UK interest rates may seem like a good thing. But look deeper and nothing about the UK’s current situation bodes well for the common man.

Consider the following: At over 5 percent, UK inflation rose higher than the hoped-for government ceiling of 1%. Right there you’ve pretty much shot the inflation outlook (and with it the outlook for interest rates) right in the foot. With an expected recession in 2009 along with falling oil prices, experts feel UK inflation will fall even further in the coming year. There are some economists who feel UK inflation could tumble below the government target limit of 1%.

The expected forecast for UK interest rates in 2009? UK interest rates have the potential to drop as low as 2% or perhaps even lower to 1.5%. And until there are some signs of even a mild economic recovery, UK interest rates will remain within these historical lows.

With that in mind – the short term forecast for UK interest rates remains anchored to how long the current recession in the UK lasts. Without a doubt, a variety of factors continue to impact the UK’s economic condition in 2008 and how those conditions relate to UK interest rate cuts:

1) The price of houses continues to tumble.
2) Unemployment in the UK continues to increase.
3) The availability of credit to all sectors is no longer available with the ease that it once was.

Let’s change course to 2009 for just a second and see what factors will influence UK interest rates in 2009. It’s no secret that CPI Inflation has roared above the UK government’s target of 3% - but don’t be fooled: those rates are expected to fall (see above), in no small part because of the increase in energy, oil and food prices.
In order to prevent the UK financial system from being sucked into a black hole along with the UK economy, the government is expected to give the Bank of England the go-ahead to ignore its inflation target of 1% with result a series of quick reduction in the interest rate that will max out in late November.

These moves will signify an overall trend of reducing UK interest rates en route to a leveling off of 3.25% by September 2009. That being said, UK interest rate cuts towards 3.25% by September 2009 will fail to significantly stimulate the UK economy which implies that UK interest rates may continue to be cut beyond Sept 2009.
A silver lining on a grey could? Not hardly. Look closer and be prepared for stormy skies ahead.

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