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A Reuters poll of 61 analysts shows that they all believe the Bank of England will raise interest rates this month, to 5.5%.
But interestingly, only 14 believe that rates will rise to 5.75% later this year – and not a single one is expecting a half-point rise this month.
It just goes to show that the markets still don’t get it. Inflation is a problem, in the UK and everywhere else – and it just isn’t going to lie down and die…
Bank of England governor Mervyn King has been trying to defend the Monetary Policy Committee’s record against accusations by various economic groups that the MPC has been too relaxed about the impact of money supply growth on inflation.
His comments came as data showed that growth in M4, the broadest measure of the money supply, came in at an annual rate of 12.8% in March.
The governor admitted that “there are times when monetary developments have… [proved] a warning sign of inflationary risk.”
Mervyn King has now said that the Bank is “trying to develop models to help us to distinguish between demand and supply shocks to money”. Well here’s a clue – if the money supply is growing at double-digit rates while economic growth is in the low single digits, there’s probably too much of the stuff floating around.
And if house prices are shooting up at double-digit rates while wage growth is in the low single-digits – well, people are maybe borrowing too much.
And actually, the Bank just needs to look back at its own records to get an idea of where interest rates should be, given the current rate of inflation. The last time the retail price index was sitting at 4.8%, back in 1991, the base rate was sitting at around 10%. Now it’s just 5.25%.
That suggests rates may need to rise a lot further than certainly the economists polled by Reuters are expecting.
Of course, every mildly weak piece of data is seized upon as another reason why rates shouldn’t rise any further. Mortgage approvals in March fell to their lowest in nearly a year, which had the pundits out warning of nervous buyers.
But one month does not make a trend. The truth is that mortgage approvals are still remarkably strong given that houses are unaffordable for most first-time buyers, and that they now make little sense as an investment. Who’s buying all these houses?
If the Bank stalls on hiking interest rates, or doesn’t hike far enough, it will just add yet more fuel to the inflationary fire. If it hasn’t learned that much at least after its disastrous rate cut in August 2005, then we’re all in trouble.
Talking of trouble, in the US, the housing slump there may be beginning to show up in the jobless numbers. An early indicator published yesterday by payroll provider ADP showed that April jobs growth in the private sector was the slowest in four years.
Now the non-farm payrolls may tell a different story when they are released tomorrow. But so far jobs growth has been one of the signs the US bulls have been pointing to as evidence that everything’s going to be fine in the land of the free. What they of course conveniently forget is that employment is a lagging indicator – in the normal scheme of things, companies lose business, then start making people redundant, not the other way around.
So first the housing market collapses, then builders stop building, then they lay off construction workers – so the unemployment data is the last shoe to drop, as it were.
And yet, despite all this, the Dow Jones headed above 13,200 yesterday, continuing its merry jaunt into uncharted peaks. But as investment expert Paul Hill told us recently, “investors are showing just too much irrational exuberance”. He reckons “a sharp correction in equity markets is on the cards” – and given all the headwinds facing markets, particularly in the US, we can’t say we’re surprised.
Just before we go, you might be interested in a webchat we’re running on the website later today. We’ve got David Dunn of Fidelity and Tom McPhail from Hargreaves Lansdown discussing retirement planning. They’ll be on site at 1pm this afternoon – if you’d like to submit a question, or just tune in and see what they have to say, visit this link: Saving for retirement webchat.
Turning to the stock markets…
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In London, platinum miner Lonmin led the FTSE 100 index 64 points higher to a close of 6,484. Dollar earners Man Group, Wolseley and Amvescap performed well as the pound weakened against the greenback. For a full market report, see: London market close.
Across the Channel, the Paris CAC-40 added 5 points to end the day at 5,990. In Frankfurt, the DAX-30 was up 47 points, at 7,455.
On Wall Street, US stocks rallied yesterday thanks to M&A activity in the media sector and strong economic data. The Dow Jones hit a fresh record closing high of 13,211, having added 75 points as the likes of Dupont, Verizon and General Motors all put in strong performances. The tech-heavy Nasdaq gained 26 points to end the day at 2,557. And the S&P 500 added 9 points to close at 1,495.
In Asia, the Hang Seng was boosted by strength on Wall Street and added 328 points to close at 20,695. The Japanese Nikkei was closed for a holiday.
Crude oil was trading at $63.98 this morning and Brent spot was at $65.93 in London.
Spot gold had fallen to $672.75 and silver was down to $13.20.
Turning to currencies, the pound was at 1.9924 against the dollar and 1.4642 against the euro. And the dollar was trading at 0.7346 against the euro and 239.35 against the Japanese yen.
And in London this morning, oil major Royal Dutch Shell reported an unexpected rise in Q1 earnings to $7.28bn due to higher profits from its refining and chemicals businesses. Royal Dutch Shell’s share price had climbed by as much as 1.2% today.
And our two recommended articles for today…
Which will crack first – the pound or the dollar?
– Though the pound may have been strengthening at the dollar’s expense, the US and UK economies also have plenty in common – not all of it good. But which is looking vulnerable. To find out – and find out what investment looks much safer than either of these paper currencies – read:
Which will crack first – the pound or the dollar?
Invest in the precious metal that could outshine gold
– Any balanced portfolio should contain a significant proportion of precious metals. But investors should look beyond the obvious – gold and silver – to another metal that’s looking particularly attractive these days. For more on how to incorporate it into your investment strategy, see: Invest in the precious metal that could outshine gold