Interest rates 'close to peak'

CITY economists believe that interest rates are at or near their peak and will remain there until at least the second half of next year.

A Evening Standard poll of 10 of the Square Mile's leading analysts shows the majority believe the Bank of England will pull the rates trigger one or two more times, taking the cost of borrowing to a peak of 5% or 5.25%.

Three think there will be no more increases while one predicts rates will rise to 5.5%.

The Bank's monetary policy committee lifted rates by a quarter-point to 4.75% last week, the fifth such move since November. But a surprisingly dovish Inflation Report earlier this week signalled the period of tightening may soon be over.

The poll reveals economists are predicting rates will not start coming down again until the second half of 2005 and possibly not until 2006.

According to the short-sterling futures market, rates will be at 5.25% in December 2005.

Keys to the outlook are the global economy, the housing market and the rate at which consumer spending slows.

Alan Castle at Lehman Brothers, who thinks rates have already peaked, said: 'Over the next two or three months, we will see downside risks coming through, particularly in retail sales and the housing market. But a weakening pound will prevent rates falling next year.'

Adam Law at Barclays Capital believes rates will rise one more time, in October, and remain there for the foreseeable future.

'Getting rates up to 5% will be enough to take the wind out of the economy's sails and bring growth neatly back to trend,' he said. 'But a cut is not on the radar screen.'

Philip Shaw at Investec is plumping for a 5.25% peak but says rates will not start falling until the third quarter of 2006.

'We think personal consumption will remain stronger for longer, requiring two more quarter-point increases,' he said.

'A key plank of the MPC's thinking will be to rebalance the economy and subdue consumer spending, which is why rates will stay put until the third quarter of 2006, by which time the global economic cycle will have turned.'

Jonathan Loynes at Capital Economics also expects two more quarter-point increases but thinks rates will start coming down again in the second half of next year. 'Experience suggests rates generally change direction quite quickly under the MPC - the two troughs and two peaks already seen lasted just six months on average,' he said.

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