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Another month, another interest rate decision. What will the Bank of England decide today?
It seems quite likely that interest rates will remain on hold this month. The recent upheaval in the stock markets is likely to have made even the more hawkish members of the Monetary Policy Committee a little wary of rocking the boat with a rise.
Of course, that’s not to say that we couldn’t do with one…
The Bank of England’s latest interest rate decision – announced at noon today – is by no means clear-cut, but on balance, we think a hold is more likely than a hike, as do most others – a survey of 67 economists by Bloomberg showed that only nine expect a hike.
Of course, the Bank has thrown surprises at the City before – but after the recent market tremor, it’s likely to be less confident about deviating from Mervyn King’s stated goal of being ’boring’ than it was in January.
But there are still plenty of good reasons to raise rates. Shop prices, for example, are continuing to rise. The British Retail Consortium yesterday reported that prices rose year-on-year for the eighth month in a row in February. And that was despite food price inflation easing off.
Meanwhile, the big event that every inflation optimist is continually pinning their hopes on – falling oil prices – just keeps getting delayed. Oil prices remain hovering stubbornly above the $60-a-barrel mark, which means petrol prices, travel costs and energy bills are likely to stay higher for longer.
Wages also remain a worry for the Bank – according to Incomes Data Services, median salaries rose by the most in five years in the three months through January.
The Bank could also point to the fact that it has also already prepared the ground for another rise – it already warned in its most recent inflation report that another hike will be needed to keep consumer price inflation (CPI) within range of its 2% central target. While CPI may have eased off a little in January from December‘s decade-high, it still stood at 2.7% – dangerously close to the 3.1% that would trigger a letter from the Bank to the Chancellor. And of course, it remains to be seen what impact Gordon Brown’s rise in air travel tax will have had on CPI last month.
So we’re still far from the interest rate peak. The markets still expect a hike by June – we suspect it will come earlier than that.
Before we go, just a quick note for anyone being sucked into believing all this nonsense we’ve been hearing recently about the UK consumer cutting back on their debts – as we’ve been pointing out for a while, the fall in credit card spending is down to banks knocking back more customers, not a newfound sense of restraint among Britain’s shoppers.
Doorstep lender Provident Financial yesterday reported in its full-year results that its customer numbers had risen for the first time in three years. The head of its UK operations, Peter Crook, said: “The big banks have tightened their lending criteria, which has pushed more people into the home credit market.”
People will keep finding ways to push up their spending until something goes wrong. The longer the Bank holds off on delivering a forceful message to consumers to slow down, the harder the fall will be when they do finally have to rein in their spending.
Turning to the wider markets…
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Property stocks and oil majors led the FTSE 100 higher yesterday, offsetting the effects of a cautious start on Wall Street. The blue-chip index gained 18 points overall to end the day at 6,156. British Land, Liberty and Land Security saw some of the day’s biggest share price rises following positive comment on the UK property sector from US broker JP Morgan. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 closed 17 points higher, at 5,455, led by EADS. In Frankfurt, automotive stocks helped the DAX-30 22 points higher to a close of 6,617.
Across the Atlantic, US stocks closed lower as investors consolidated Tuesday’s gains. The Dow Jones fell 15 points to end the day at 12,192 as blue-chips including American Express and Coca-Cola weighed. The tech-rich Nasdaq fell 10 points to a close of 2,374. However, the broader S&P 500 climbed 3 points to end the day at 1,391.
Exporters such as Toyota were given a helping hand by the weaker yen in Asia trading, sending the Nikkei 225 325 points higher to a close of 17,090. In Hong Kong, the Hang Seng closed 256 points higher, at 18,909, today.
Crude oil was higher again today, last trading at $62.02 a barrel, whilst Brent spot was at $61.76 in London.
A spurt of buying by Japanese investors saw spot gold hit an intra-day high of $654.00, although it had fallen back to $652.70 this morning. Silver, meanwhile, had risen to $13.03/oz.
And in London this morning, power firm Drax announced annual earnings before tax of £583m compared to £239m in 2005. The company, which is the UK’s largest source of CO2 emissions, also revealed that it would be investing £67m in reducing greenhouse gases.
And our two recommended articles for today…
How the Fed lost control of the money supply
– In their efforts to boost US consumer spending following the bursting of the tech bubble, US and Asian policymakers set a train in motion of which they have now lost control. But could they just wait for financial markets to bring credit expansion under control? asks Axel Merk. To find what the Fed and the markets are likely to do next – and how to prepare – read: How the Fed lost control of the money supply
What market fundamentals are telling us
– Recent market turmoil should have set investor alarm bells ringing, so now is the perfect time to revisit fundamentals and ensure that your investments could weather tougher market conditions. If you’d like to know how to steer a course through greater volatility, click here: What market fundamentals are telling us