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Mervyn King warns of increase in base rate

Mervyn King, the Gov of the Bank of England, has today warned that UK interest rates will need to rise at some stage in order to manage the eventual exit from the UK recession. This statement has surprised many because recently Mervyn King was of the opinion that if inflation continued to fall back, as the Bank of England has always believed, then there would be little reason to increase base rates. So what is going on?

UK base rates have remained at 0.5% for well over a year now in order to secure a line of cheap credit for the money markets. However, the current economic difficulties are very different to anything else we have ever seen before and interest rates alone will not dictate how and when we move back into a growth phase. There is no sign as yet as to when UK base rates may rise but the very fact that Mervyn King has warned this is inevitable at some point will focus the minds of many investors and many analysts.

The truth is that if UK base rates do rise, and inflation remains fairly subdued, then it is likely that base rates will be rising due to economic prosperity returning to the UK. The government and the Bank of England need to ensure that the boom and bust scenario of years gone by does not return in the short term because ultimately providing cheap credit in an economic upturn could prove to be a massive mistake.

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