Rob Starr, Big4.com
25 August 2010
(blog) Fair Investment.co.uk has an interesting story about how “Andrew Lilico, chief economist at Policy Exchange claims that interest rates could have to increase to eight per cent to combat the high inflation that will couple the boom he is predicting.”
And this totally contrary to the Ernst & Young ITEM Club report from last month which states the opposite—that in fact those rates will remain at 0.5 percent until 2014. See our write up on this at http://www.big4.com/?page=news_detail&url=ernst-and-young-calls-it-right-on-uk-boe-interest-rate-decision-1431.
Does anyone remember what happened to the interest rates in the 1980s? Let’s hope so.
Still Andrew Lilico suits squarely on the other side of the fence for the Policy Exchange. His prediction does have a bit of a silver cloud however in that he thinks there’s a boom coming that will necessitate the rise in interest rates to combat inflation. There’s still that negative talk mixed in with his ideas that we’ll need to go through a double dip recession first however.
The Ernst and Young report seems to be the more realistic of the two. It suggests that there will be slow economic growth over the next two years to be followed by a gradual pick up in 2012.
They seem to have taken the crystal ball out of the formula and just relied on some solid facts here, stating that the UK deficit will be reduced by 2015-2016. All this without any talk of a double dip recession. To be completely fair, the recent slowdown in global growth forecasts, the steep drop in the long-bond yield, persistently high unemployment, talks of deflation – all point to lower rather than higher interest rates, at least at this point in time.
Though a high-growth high-inflation scenario as envisaged by Lilico would be in some sense better than true deflation, it seems that the world is not veering in that direction Which is why the more conservative estimates by Ernst and Young seem to mirror what the successful investors and perhaps even governments like Canada are doing it by playing it safe with their money in low-cost but sure-play debt instruments. (blog)