At first glance, the doves will love the latest Bank of England inflation report. The rise in the cost of living, as measured by the Retail Price Index (excluding mortgage payments), is now higher than the Bank’s 5% base rate; and at 4.4%, the Consumer Price Index – the Bank’s key inflation guage – may be heading the same way. But don’t fret, said the Bank: within two years, CPI should drop back to below the 2% target, even if interest rates are left on hold for now. This was “generally more dovish than might have been expected”, said Jonathan Loynes of Capital Economics, “as the medium-term inflation profile has been revised down quite sharply, suggesting that the Monetary Policy Committee is gradually becoming more concerned about the outlook for the economy”.
The outlook for growth is grim
And little wonder. Unemployment has just climbed by the most in almost 16 years, taking the headline rate to 5.4%. “The weakness in the labour market will weigh on consumer spending,” said Jeavon Lolay at Lloyds TSB. Already UK retail sales are growing just 1.7% year-on-year, said the British Retail Consortium this week, with “every sector except food recording falls”, said BRC director general Stephen Robertson. And the housing market continues to deteriorate. The RICS property survey for July showed that the number of estate agents seeing price falls exceeded those reporting gains by 84%. “The lack of mortgage finance has brought the housing market to a virtual standstill,” according to RICS’s Ian Perry. Repossessions are up 48% on last year, said the CML, the highest figure since the first half of 1996. That weighed on lenders such as Britannia Building Society, where extra bad loan provisions caused first-half profits to fall 36%. Further “losses may come about more quickly than expected”, said chief executive Neville Richardson.
Interest-rate cuts remain unlikely
But cutting rates isn’t an option as yet. The price of goods leaving Britain’s factories rose at its highest annualised rate, 10.2%, since the series began in 1986. Input costs jumped by 30%. The Bank of England “is very far from being out of the inflation woods yet”, said Howard Archer at Global Insight, “and will be reluctant to cut interest rates until early in 2009”. Yet “a prolonged slowdown” will “reproduce many of the bad conditions of the early 1990s”, as the Liberal Democrats’ Vince Cable put it. Prepare for more repossessions and job losses in the months to come.