It was always going to be a tight call.
Today the Bank of England’s rate-setting Monetary Policy Committee (MPC) decided not to change benchmark base rates following last month’s 0.25% cut.That’s the outcome most analysts were expecting but that doesn’t mean it was a given.
Instead the ‘doves’ had plenty of ammunition to back up their case that rates should be cut immediately.
March manufacturing production declined by 0.5%, according to yesterday’s numbers from the Office for National Statistics, compared with a 0.4% gain in February. And although for the first quarter as a whole, factory output gained 0.3%, industrial production – which also includes oil and gas extraction and utilities – dropped by 0.2%.
And if that sounds bad, look at the April Nationwide consumer confidence Barometer. That made for really nasty reading. The headline index slumped 7 points to a reading of 70, the lowest since the survey started in May 2004 and 22% down on last year. All the sub-indices also slipped into sharp decline, with a record 39% of respondents viewing the current UK economic situation as bad and 45% believing it will get worse in six month’s time.
Further, a staggering 60% of those surveyed apparently consider that now is definitely a bad time to make a major purchase such as a car, or indeed a house. No surprise then that April’s Halifax House Price Index findings show UK property values have fallen year on year for the first time since 1996.
What’s more, growth in Britain’s service industries, ranging from airlines to hotels to hairdressing, has slowed to the weakest pace in five years.
Whilst the April reading of 50.4 still implies that the service sector is expanding, it’s not by much. Not only was that the lowest level recorded since March 2003, it came in well below Bloomberg’s consensus expectation of 51.7. Further, the negative effect of jobs being chopped by estate agents, builders and the City will soon show itself in more damage to consumer spending.
So all in all, the UK’s in more than a mess and the stats would ordinarily justify lower rates. But these aren’t ordinary times because the MPC ‘hawks’, who oppose lower loan costs, also had heavy-duty firepower of their own.
The Bank’s rate-setters’ sole mandate is to keep CPI (consumer price inflation) at 2% – no more, no less. CPI is currently well above target at 2.5% and heading higher even by Bank of England governor Mervyn King’s own admission. Indeed he has already publicly admitted there’s a fair chance that he’ll need to pen an open letter to the Chancellor explaining why CPI has hit 3%.
Soaring food and fuel prices may be the usual suspects, but with oil in particular continuing to rocket skywards to new highs – Goldman Sachs is now talking a ‘super-spike’ to $200 barrel – those inflation concerns are set to worsen. Throw in ever-climbing food costs and the logical response from the MPC would actually now be an increase in base rates, not a cut.
Anyway, it’s not like the rate slicing to date has done much good to any one but the banks. Certainly homeowners haven’t received too many favours. Many fixed-rate mortgages are becoming more expensive as home loan providers have finally worked out that their lax lending policies up till last year were veering towards complete banking insanity. Borrowing criteria are now being tightened up by the day, and more and more mortgage product offers are being withdrawn.
And with 3-month LIBOR the London interbank offered rate at which banks lend to each other refusing to dip below 5.75%, showing just how nervous lenders are these days, there isn’t too much light at the end of this particular tunnel. For many of us, the cost of borrowing isn’t falling at all.
(Incidentally, the credit crunch seems to be playing into the hands of second-tier lenders like Provident Financial, who today reported ‘strong’ demand for credit this year as the larger players pulled out of the market.
That £200bn-plus of consumer debt hanging like a millstone around Britons’ necks won’t just disappear, whatever the level of interest rates.)
So in essence, despite all eyes being focused on today’s 12 noon decision, it was all something of a non-event. Yet care is needed. If the markets start to factor in any future rate slashing, sterling would be vulnerable to further erosion, which would exacerbate the inflation problem by further pushing up the price of imported goods. Particularly as the European Central Bank has today again refused to capitulate to demands for lower loan costs.
The Bank of England is still standing on a knife-edge…