Interest rate monitor
Monday, 04 Aug 2008 00:01
What will the Bank of England do with interest rates this month?
On Thursday the Bank of England's monetary policy committee (MPC) announces the outcome of its monthly meeting deciding whether to lower, hold or raise interest rates. We assess the current economic situation to work out what might be running through the heads of its nine members in the run-up to August's meeting.
July's decision
Last month the MPC opted to hold interest rates at five per cent for the third month in a row. The decision was a three-way split, with David Blanchflower lobbying for a 0.25 per cent cut, Tim Besley arguing for a 0.25 per cent rise and everyone else voting to hold.
The story of worsening economic indicators combined with rising inflation continued throughout July, making the Bank's decision only more difficult.
"For all members of the committee, the decision was a difficult one," the minutes said.
"A rate change this month would be a surprise at a time when credit and other financial markets remained fragile," it added.
The UK economy
Retail
Following a surprise 3.6 per cent surge in May, sales plunged 3.9 per cent in June.
The fall cut the annual growth rate to 2.2 per cent, while sales in the three months to June were up 0.6 per cent on the previous three months, according to data from the Office for National Statistics (ONS).
British Retail Consortium (BRC) figures confirmed the fall, with like-for-like sales down 0.4 per cent in June.
Meanwhile, the Confederation of British Industry's (CBI) retail sales index dropped to the lowest in 25 years in July. The index found 25 per cent of retailers sold more goods than a year earlier and 61 per cent sold fewer, giving a balance of -36.
Property
The house price decline accelerated in July, with Nationwide reporting average falls across the country of 1.7 per cent in July – more than double the 0.8 per cent decline recorded in June.
Consequently the annual fall in house prices now stands at 8.1 per cent, the fastest rate of decline for nearly 20 years.
In addition, lending for house purchases fell 70 per cent compared to last year, an increase from the 63.8 per cent fall recorded last month, according to the Bank of England.
The number of home loans approved in June fell to 36,000, down from 41,000 in May, as the slowdown continued.
Lenders are also getting gloomier over the property market's prospects and HBOS, the UK's biggest mortgage lender, predicted house price falls of between 15 to 20 per cent by 2009.
Manufacturing
The evidence of an accelerating slowdown for the UK economy continues with July's data for the manufacturing industry. The Chartered Institute of Purchasing and Supply (CIPS)/Markit Purchasing Managers' Index (PMI) fell to 44.3 last month from 45.9 in June, the third consecutive monthly decline.
The data show manufacturing activity has fallen to its lowest in a decade. The sector is suffering from high input costs and low demand, which is discouraging firms from increasing their prices.
Howard Archer, chief UK economist at Global Insight, said the CIPS data point to a fall in GDP in the coming quarter.
"Yet more really horrible news on the economy, and contraction in the third quarter is looking ever more probable," he said.
Consumer confidence
Consumer confidence in the UK has dropped to an all time low in July, the GfK NOP index shows.
The GfK NOP index – used by the Bank of England – fell another five points over the month to -39, four points lower than in March 1990 when the UK was heading for recession.
In addition, Lloyds TSB consumer barometer for June shows job security and employment confidence have fallen to a new survey low.
The survey also shows people's expectations of inflation have risen to 4.8 per cent, from 4.7 per cent in June.
Inflation
The consumer price index (CPI) leapt to 3.8 per cent in June, from 3.3 per cent in May and is now running at its fastest pace since 1997. The largest contributors to the increase were from gas, electricity and heating oil as energy prices continued to soar. The rising cost of food was also a major factor, while an increase in duty on alcohol pushed prices up further.
With energy suppliers starting another round of price hikes, inflation is expected to rise further, possibly hitting five per cent in the autumn, analysts have speculated.
This week's decision…
…will be to hold. Despite Mr Blanchflower's call for a cut in interest rates last month, there is no evidence inflation is stabilising and is likely to rise further when the CPI figures are next released. On the other hand, economic indicators show the slowdown is accelerating, making a hike in interest rates unlikely for the moment.
The interest rate seems set to remain frozen for some time, possibly into 2009 when there may be scope to bring it down.