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It’s that time of the month again.
Anyone with a variable rate mortgage will be nervously eyeing the clock, waiting for noon to find out if the Bank of England is going to make life more expensive for them or not.
The Monetary Policy Committee has been poring over the latest news on the UK economy – much of which the public won’t see until after today’s interest rate decision.
Most economists don’t think the MPC will raise base rates again this month – but then, only one person in the City predicted last month’s hike, so that doesn’t count for much.
So – will they or won’t they?
We didn’t predict last month’s interest rate hike – we thought they‘d leave it until this month. So it’s a tough call – does the Bank think it’s done enough for the time being, or does it want to hammer the point home? Markets are pricing in a one in four chance of a hike, the most divided they‘ve been in some time.
The MPC will of course have the quarterly inflation report, as well as January’s inflation data in front of them. The inflation report gives the Bank’s forecasts for what will happen to inflation going ahead – over the next two years in particular. It’s been consistently over optimistic in the past, and economic data over the past month won’t have eased any of the Bank’s fears over inflationary pressures.
Recent data showed that UK retail sales had their strongest January for three years. And that wasn’t because they were slashing prices – data from the British Retail Consortium yesterday showed that shop prices were up again, year-on-year, for the seventh month in a row. So much for the January sales.
And of course, inflation under the CPI measure is at 3% – the highest it can go without Bank governor Mervyn King being forced to write a letter of explanation to the Chancellor. If the quarterly inflation report suggests that CPI will breach 3% imminently, then the MPC could easily justify a further rate hike this month.
Last month’s vote was very close – only 5-4 in favour of the rate rise – so it doesn‘t take much of a shift in sentiment for rates to stay on hold this month. But if the aim behind the January hike was to shock markets out of their complacency, then a hold this month could undo all that good work – investors are looking for an excuse to relax and feel that all is well with the world again, when frankly, it’s not.
Don’t just take our word for it. In Monday‘s Telegraph, Roger Bootle of Capital Economics wrote: “I cannot recall a time when asset prices have been so out of kilter with consumer prices.”
He points to the soaring inflation data (on all measures, inflation is at its highest in more than a decade – in fact, if the Bank was still using its old target measure, RPIX, it would have already had to write a letter to Gordon Brown); 13% growth in the money supply; and the fact that real rates (adjusted for inflation) are “roughly half their average level since 1989. In fact, they are just about the lowest they have been since the MPC was formed 10 years ago.”
He sums up: “What more evidence do you need? Rates are simply too low… I would have rates at 6% and I would make a start by raising them this week to 5.5%.”
Of course, Mr Bootle’s not on the MPC (though we reckon he might not be a bad choice next time they’re recruiting). And judging by last month’s vote, there are more than a few who would disagree with his analysis.
But on balance – particularly given his point about real interest rates – we reckon the Bank will hike again this month. And even if it doesn’t, the next rise won’t be long in coming – and it won’t be the last of this cycle, not by a long shot.
Turning to the stock markets…
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In London, the FTSE 100 hit another 6-year high of 6,369 yesterday, having gained 23 points due to strength in the mining sector and a strong start on Wall Street. Miner BHP Billiton topped the leaderboard with gains of over 5% after it announced a $10bn cash return to shareholders. For a full market report, see: London market close
On the Continent, the Paris CAC-40 closed 26 points firmer, at 5,703, whilst the Frankfurt DAX-30 was 39 points higher, at 6,915.
Across the Atlantic, the Dow Jones backed off from an all-time high yesterday as energy stocks weighed. The industrials index closed a fraction of a point higher, at 12,666, as the likes of Exxon-Mobil fell on the weaker crude price. The S&P 500 was 2 points higher, at 1,450, whilst the tech-rich Nasdaq clung on to earlier gains to end the day 19 points higher, at 2,490.
In Asia, the Nikkei closed flat as concerns over the rising yen weighed. The index closed fractionally higher, at 17,292, today.
Crude oil futures had fallen back down to $57.68 this morning, whilst Brent spot was also lower, at $56.88, in London.
Spot gold had risen to $652.70 this morning and silver had also edged up to $13.63.
And in London this morning, shares in HSBC had fallen over 2% after the bank announced that bad debts for 2006 were 20% higher than forecast. HSBC blamed the problem on rising delinquencies in the US subprime home loan market.
NB. Remember to check MoneyWeek.com at noon today for the Bank of England’s latest base rate decision.
And our two recommended articles for today…
Why 2007 will be the Year of Commodities
– The economies of China and India look set to continue their meteoric rise in 2007 – and that means it will be another great year for commodities, says Puru Saxena. Find out which commodities are set to be the star players – and why now could be the last decent buying opportunity you get for precious metals and mining stocks – by reading: Why 2007 will be the Year of Commodities
Where’s all the oil money going?
– In the past, petrodollars were usually reinvested into the US Treasury market, but not any more. In a recent issue of MoneyWeek, Dan Denning tracked down the new destination for the oil exporters’ millions – and it’s one of the biggest investment stories of the moment. To find out what it is – and how you can get involved – see: Where’s all the oil money going?