Interest rate monitor
Monday, 01 Sep 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 September's meeting.
August's decision
Last month the MPC opted to hold interest rates at five per cent for the fourth month running. Once again, 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 reasons for the interest rate freeze were similar to those in July. The economy is still slowing and a recession is looking likely but inflation is still far above the Bank's two per cent target.
The UK economy
Retail
July did not show much of an improvement for retailers, and figures coming through for August suggest the rain did nothing to encourage shoppers.
The CBI Distributive Trades Survey reveals 60 per cent of firms reported sales in the first half of August lower than a year ago, while just 13 per cent saw them rise.
This leaves the balance at -47, a drop of 11 points from last month, leading some analysts to suggest conditions for retail may be even worse than those of the last recession, in the early 1990s.
For July, there was some disagreement between the British Retail Consortium (BRC) data and figures from the Office for National Statistics.
The BRC research shows UK retail sales values fell 0.9 per cent on a like-for-like basis, compared with July 2007, while the ONS found total sales values were up 3.8 per cent on a year ago. The ONS data suggest the situation is improving but the BRC claims using total sales is misleading and using like-for-like figures is a more accurate barometer of the high street.
Property
Nationwide has more bad news for homeowners, revealing property values have dropped by a tenth since last year. Property prices fell 1.9 per cent in August, taking the annual fall to 10.5 per cent.
Figures from the Council of Mortgage Lenders (CML) revealed the slump in mortgage lending continued in earnest during July.
Total lending stood at £24.8bn, 27 per cent lower than a year ago.
The slump has affected the construction industry and housebuilders Taylor Wimpey and Bovis both reported sharp falls in profits this month.
Gross domestic product (GDP)
Data from the ONS reveal GDP growth in the second quarter of the year stood at zero per cent – compared to a previous estimate of 0.2 per cent.
It is the first time growth has been at zero per cent in 16 years and brings to an end 64 consecutive quarters of economic growth.
Annual GDP growth is now 1.4 per cent – the weakest since 1992.
Analysts Capital Economics are predicting a recession in 2009, with at least two quarters of negative growth. This is worse than previous forecasts and the economists are also forecasting a sharp decrease in interest rates next year as a result.
Consumer confidence
Consumer confidence improved slightly in August - possibly due to a boost from the Olympics.
The index, which measures the consumer outlook each month, rose three points from July to -36 in August. However, this was still 32 point lower than last year, GfK NOP said.
Rachael Joy in the consumer confidence team at GfK NOP, said: "We have seen a small improvement in consumer confidence in August, but this should not be seen as a turnaround in core sentiment."
In addition, Lloyds TSB consumer barometer for August shows consumers believe the rate of inflation will rise to five per cent, up from 4.8 per cent in July.
Job security fears intensified in August, falling again to a new survey low.
Inflation
The consumer price index (CPI) leapt to 4.4 per cent in July, from 3.8 per cent in June, the highest level since records began in 1997. Food inflation was at 13.7 per cent.
The Bank of England released its inflation report this month, which gave a gloomy analysis of the economy. Although carefully avoiding the r-word, the Bank predicted Britain's economy will start shrinking by the end of the year.
Despite the likelihood of inflation hitting five per cent, the report suggested a leaning toward cutting rates rather than raising them in the short term.
Regardless of what the MPC do with the rates, the next two years will be hard for consumers, the report warned.
This week's decision…
…will be to hold. Probably. Inflation is still rising and the MPC has sent a strong signal these last few months that it is not prepared to risk pushing it any higher with rate cuts. However, the economy has now officially ground to a halt and economists are now looking at recession as a genuine possibility. If this happens, there is every chance inflation will fall further than the Bank's two per cent target. So the high rate of inflation may be enough to persuade the committee to hold once more, but it is looking like a cut is on the horizon.