Despite coming under mounting pressure from troubled retailers and housebuilders, not to mention a dubious suggestion from the Chancellor at this week’s press briefing that there might be “room to manoeuvre”, the Monetary Policy Committee decided today to leave the base rate at 5.5%.
Those clamouring for a cut before today’s meeting will be sorely disappointed. On the high street, Christmas trading conditions were “the toughest we have seen in a decade” according to the Marks and Spencer chief executive, Stuart Rose, who made no secret of his desire to see borrowing costs reduced to revive spending amongst nervous UK consumers.
His sentiments have been echoed by a wide ensemble of Britain’s business chiefs from companies such as DSGI, which recently issued a surprise profit warning, to the UK’s biggest housebuilder Persimmon, which announced a 14% drop in forward sales just this week.
On top of that the MPC had to weigh up the impact of further falls in UK house prices – November’s mortgage approval figure from the BBA, a reliable lead indicator, was down 18% on a year earlier – plus a slump in service sector confidence, indicated by the first drop below 100 since October 2005 in the BDO Stoy Hayward index.
So why did the MPC stay its hand? Well, despite the rate-cutting noise from certain sectors, the case for the first back-to-back monthly cuts since the aftermath of 9/11 was far from obvious. As I mentioned in yesterday’s piece on “Mervyn King’s perfect headache”, the MPC’s primary role is to monitor and control UK inflation and here the risks are still very much on the upside.
This is thanks to the rising cost of goods from emerging markets such as China combined with a falling pound (which hit an all-time low against the euro on Wednesday) – a double whammy raising the spectre of imported inflation. Throw in oil at close to $100 a barrel and a recent CPI reading already above the 2% target, at 2.1%, and it becomes very clear why the MPC might prefer to wait at least another month before acting.
A final thought – the credibility of an independent Bank of England has already been thrown into some doubt following a good deal of dithering when the Northern Rock crisis broke. Another rate cut might have looked like panicking, or perhaps worse, caving in to the wishes of the Treasury. Either perception could fatally wound the Old Lady.