Interest rates 'to be kept on hold'

Evening Standard13 April 2012

THE Bank of England's monetary policy committee kicks off its latest meeting today with interest rates having been held at 4.75% since August last year.

This month's meeting coincides with the quarterly update of the MPC's economic projections, which will be published in its Inflation Report next week.

The Bank has a history of being trigger-happy with rates in Inflation Report months, so there are more jitters than usual going into today's meeting.

Jane Padgham assesses the items on the MPC's agenda before it delivers its verdict at midday tomorrow.

House prices

After slowing sharply in the second half of last year, the housing market is showing signs of stabilising. Halifax said prices rose 0.8% in January following 1.4% gains in December while mortgage rival Nationwide reported a 0.4% January increase and said the market was poised for a spring revival. That view was backed by official figures from the Bank showing mortgage approvals are picking up. The upbeat news has raised hopes that a property crash will be avoided.

High Street spending

Retailers' tales of festive woe were backed by official figures confirming the High Street suffered its worst Christmas for 23 years. Retail sales dipped 1% in December as virtually every sector, apart from internet retailing, was hit. The fall came despite reports of widespread discounting. Retail weakness looks to have extended into the new year, the CBI reporting the worst January for six years and the British Retail Consortium saying like-for-like sales were only 0.5% higher than a year ago.

Growth

The economy ended 2004 on a high note with gross domestic product - a measure of overall economic activity - expanding by a punchy 0.7% in the fourth quarter. That was better than the previous quarter's 0.5% and marked the 50th consecutive quarter of expansion. However, the economy remains chronically unbalanced, the services sector expanding by 1% while production industries shrank by 0.5%. Economists predict a reasonably strong start to 2005 before growth slows later this year.

Manufacturing

News on the long-suffering sector goes from bad to worse. While official data have confirmed that industry is back in recession, previously upbeat survey evidence is starting to take a turn for the worse as well. The closely watched purchasing managers' index from the Chartered Institute of Purchasing and Supply showed activity slowing to its weakest for 18 months, driven by a drop in export orders.

Inflation

The City is getting twitchy about inflation after a series of unexpected increases in recent months. Dearer household utility bills, furnishings, computer games and theatre tickets pushed inflation from 1.5% to 1.6% in December. Although still well below the 2% target, it was the highest for six months. Fuelling inflation fears has been a pick-up in earnings growth to 4.4%, just below the 4.5% ceiling the Bank deems compatible with the inflation target.

Sterling

Inflation jitters have been stoked by the pound's fall over the past month, making imported goods more expensive. The dollar's slide has been stemmed for now, helped by Federal Reserve chairman Alan Greenspan's seemingly relaxed attitude toward the US current account deficit, sending the pound about four cents lower against the greenback since the MPC last met.

MPC comments

The minutes of the MPC's January meeting showed the committee abandoning its easing bias in favour of a more neutral stance. Having felt in December that the downside risks to the inflation projection had increased, by January the MPC judged these had failed to materialise. Bank Governor Mervyn King was at pains to play down weak Christmas retail figures, while Stephen Nickell said goods price inflation was coming to an end.

Verdict

This month's interest rate decision should be another straightforward one. Surrounded by statistical fog and economic uncertainty, the MPC has little choice but to keep rates on hold at 4.75% for the sixth month in a row. Where rates go from here is uncertain and the City is split on whether the next move will be up or down. But, with the housing market stabilising and inflation pressures picking up, another increase can no longer be ruled out.

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