One area that permeates all our lives is inflation. It often affects the level of increases in our income, the cost of goods and services and has implications for the returns on our investments.
To control inflation successive governments and now the Bank of England have used interest rates as a lever. The level of interest rates impacts both savers and mortgage holders in opposite ways.
So were do we think inflation and therefore interest rates are heading. There are many differences of opinion on this point and we have seen a number of articles in the daily papers suggesting we could see interest rates of 10%+
There is no doubt we could see spikes in short term rates, but our view is inflation will remain subdued for some time to come. Economic growth in the west is low (talk of a double dip recession) and any rise in rates by the BOE would stifle the recovery. Products imported from Asia have meant low prices for many consumables and if economic growth is sluggish commodity prices will also fall.
This view is backed by the recent decline in the yield of the 10 year government bond to 2.89%. The 10 year gilt is seen as a good indicator of how the market perceives long term interest rates.
In the long term the real danger may not be inflation but rather the threat of deflation which stifles consumption and limits economic growth

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