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Is the Bank of England set to give everyone a little surprise ahead of the Easter bank holiday?
The broad consensus is that the Bank won’t raise interest rates this month, but probably will next month. Only eleven out of 60 analysts polled by Reuters reckoned there’d be another hike this month.
But no one can deny it’s a tough call. The Bank showed earlier this year that it’s not scared to surprise the markets, and the truth is, there’s no reason to put off a rate rise until May.
Let’s have a look at why…
The market is expecting another UK interest rate rise, but most reckon it won’t come until next month.
At first sight, it seems like a reasonable assumption. For a start, up until this year at least, the Bank has tended only to change rates when the quarterly inflation report comes out – and that’s not due until next month. And last month, the vote was 8-1, with the dissenter, David Blanchflower, voting for a cut, rather than a hike.
But we wouldn’t read too much into this – at least five MPC members tend towards hiking interest rates, so it doesn’t really matter what Mr Blanchflower thinks, he can easily be outvoted.
And the reason that those Monetary Policy Committee members who are more inclined to hike rates didn’t vote for a raise last month was because of fears they might exacerbate the February stock market slump. But as this has apparently passed (for the time being at least) there’s no reason for them to be as cautious this month.
Meanwhile, companies remain confident about putting up their prices, with rising food costs a particular problem – statistics from the British Retail Consortium show that shop prices were up year-on-year again for the ninth month in a row during March. This is a big worry for the Bank – rising shop prices tend to result in workers looking for bigger wage increases, which of course spurs inflation on further.
And despite the UK savings rate now being negative (if you exclude pension contributions, as they do in most major economies), the consumer shows no signs of slowing their spending. House price inflation remains strong, while mortgage equity withdrawal (people borrowing money against the value of their homes) is rising strongly again – coming in at £49.7bn during 2006, compared to £36.6bn in 2005.
Against this, the Bank might still be fretting about the potential impact of the sub-prime mortgage meltdown on the US economy. The fear is certainly spreading among more forward-thinking investment managers. For example, Ken Murray, who owns Blue Planet Investment Management, has just cut all borrowing to zero across the company’s portfolios and has sharply increased its cash holdings. He is concerned that a US recession is coming our way, and that global stock markets could fall by more than 20%.
But ultimately, this isn’t the Bank’s main concern – inflation is. And inflation these days has a nasty habit of surprising on the upside – Dan Bunting of Fortis Private Investment Management summed it up well when he told Reuters: ‘We keep having to revise upwards what we feel the peak in interest rates will be. Although we term it an inflation blip, it keeps on blipping. It’s a storm in a teacup, but one that’s always getting slightly worse.’
So if the Bank wants to have any hope of getting ahead of inflation, it has to start surprising on the upside itself. There’s no reason why the Bank should wait until next month to raise rates. The move is widely expected, so if it wants the rise to have any genuine deterrent impact, then it should raise them this month.
And we reckon that’s what it will do.
Turning to the stock markets…
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In London, the FTSE 100 closed one point weaker at 6,364 this morning, although the broader indices were generally higher. Home Retail, owner of Argos, made the biggest gains of the day following a broker upgrade. For a full market report, see: London market close.
Elsewhere in Europe, the Frankfurt DAX-30 closed 28 points higher, at 7,073 and the Paris CAC-40 rose 7 points to a close of 5,719.
On Wall Street, the Dow Jones recovered from earlier losses to end the day 19 points higher, at 12,530. The tech-heavy Nasdaq chalked up its fifth session of gains in a row, adding 8 points to close at 2,458. And the broader S&P 500 was one point higher at 1,439.
In Asia, the Nikkei fell 52 points today to close at 17,491 as investors ditched oil stocks.
Crude oil was last trading at $64.27 this morning and Brent spot was at $68.85 in London.
Spot gold had climbed as high as $674.70 in intra-day trading, near a five-week high, but had slipped to $672.40 this morning.
And in London today, Barclays announced plans to sell off most of its high-risk subprime loans, part of the bank’s under-performing Barclaycard unit, to US-cased CompuCredit Corp.
And our two recommended articles for today…
How the US government taxes productivity
– Why are official inflation figures so at odds with most people’s experience of rising prices? For more from Richard Benson on how the US government adjusts the official measure – and why, whether you’re a saver or an investor, you should be wary of paper money – read: How the US government taxes productivity
Penny shares to profit from in 2007
– At the beginning of the year, small caps expert Tom Bulford outlined the major themes small cap investors should pay attention to this year – plus a selection of the best penny shares for the year ahead. This article is now available to non-subscribers, so click here to read this essential guide to small cap investing this year: Penny shares to profit from in 2007