Bank of England rates paralysis to continue
AS WE enter the first full trading week of the second half of the year, the markets remain in a foul mood. Bad news suggesting that the economic recovery has stalled invariably leads to daily sell offs while good news is ignored.
In fact, when we get yet another Bank of England rate decision on Thursday, leaving rates unchanged at an accommodative record low, don’t expect a cheer in the Square mile. It will almost certainly be read as yet another signal that growth has broken down.
But when will UK interest rates become less predictable? The Monetary Policy Committee won’t raise the base rate from its current 0.5 per cent level until the second quarter of 2011, according to a poll of economists by Reuters last week. But is the MPC any clearer about the UK economic outlook than the rest of us?
The answer, of course, depends on which member you ask. Andrew Sentance believes rates need to go up now to combat the worrying inflationary trends developing in the economy, this despite May’s fall in the consumer price inflation measure to 3.4 per cent from it’s April 17-month high.
Others are more willing to point to one -off factors in the stubbornly high inflation rate. And, as Monument’s Stephen Lewis points out, another MPC member, Dr Adam Posen, concluded that there were special factors at work in pushing UK prices higher.
Lewis added that Posen gave the impression that: “He still saw downside inflation risk in the fiscal austerity in the UK…but, if that risk were not to crystallise, he would be ‘only to happy’ to raise interest rates.”
Analysts at Jefferies point to the rises in VAT (not the one pencilled in by George Osborne but the one where Alistair Darling took it back up to 17.5 per cent from 15 per cent as of December 2009) as a major factor in the upside pressure on inflation.
“In the ONS’s core measure UK inflation has been running at three per cent. Exclude VAT and energy and the figure is close to one per cent, a significant difference.”
In fact, if you add in the Osborne VAT rise to 20 per cent in January next year, another 1.5 per cent will be added to CPI, says Jefferies, which means Mervyn King will be writing more letters to the Chancellor explaining why this is no cause to panic.
Going into this week’s MPC meeting, its members appear as uncertain as the rest of us as to whether inflation or deflation is the greater risk. Isn’t it time the great and the good of the BoE made up their minds? Until they show us some conviction, what hope for investors and a resumption of market confidence?
Steve Sedgwick is a presenter on Squawk Box Europe each weekday morning on CNBC. http://europe.cnbc.com