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Is The Economic Straightjacket Tightening?

This week saw the largest weekly decline in two year UK government debt notes for 14 years with traders concerned that the recent spate of interest rate reductions in the UK may be at an end. The move was prompted after the Bank of England’s recent review of inflation which suggested that the rate could nudge towards 4% in the short term.

Many experts believe that we are unlikely to see any more interest rate reductions for some time as the economic straightjacket around Gordon Brown continues to tighten. The implications longer term indicate an increase in the cost of borrowing for the UK government with higher inflation likely to bite into the ‘real yield’ (i.e. the base rate less inflation).

This could not have come at a worse time for Gordon Brown as he piles more and more debt onto the UK economy in order to ride the current storm. Even after the recent reduction in growth forecasts for the UK, many still believe that the government are still over optimistic â€" with even the European and World Banks concerned.

Higher interest rates will reduce the strength of the expected bounce in the UK economy when it does bottom out and recovery may take a little longer than first thought.

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