16 May, 2008 |

Outlook uncertain for interest vote

Heres hoping they can kiss and make up. The nine men and women on the Bank of Englands Monetary Policy Committee (MPC) will meet this morning to begin their interest rate deliberations still bearing the bruises from their meeting last month.

Januarys vote broke all the rules. Paul Tucker, the MPCs arch hawk, voted against raising rates, concerned that the market might get ahead of itself. More external members voted for tighter policy than Bank officials did. For the first time, Mervyn King, the Governor, used a deciding vote to push through higher rates.

Today, it all kicks off again, as the MPC meets to review data from the past four weeks in preparation for next Thursdays decision. Here, we analyse whats on their agenda.

Growth: strengthening
GDP in the fourth quarter was reported as growing 0.8 per cent by the Office for National Statistics last month. The 3 per cent year-on-year rate was the strongest in two years.

Part of the strength came from retailing, which turned out to have had a healthy Christmas. Sales volumes rose by 1.1 per cent in December. The CBI said that sales were even stronger in January, much to the surprise of retailers.

Manufacturing picked up in November by 0.3 per cent, almost reversing Octobers dip.

Prices: will the shock fade?
This months big shock was inflation hitting 3 per cent on the consumer price index, and reaching a 15-year-high of 4.4 per cent on the retail price index. Any higher, and the Governor would have had to write an explanatory letter to the Chancellor. Although the Bank expects inflation to fall back this year as lower oil prices feed into the annual figures, the psychological effect of a spike in inflation risks boosting expectations of higher prices, a major headache.

The Banks other chief concern is wage settlements. The official data, a few months out of date, show that average earnings including bonuses rose by a benign 4.1 per cent in November, unchanged from October. However, unofficial data point to higher settlements in the crucial January pay-bargaining period.

However, January brought the first signs that the housing market may be softening in response to higher interest rates. Nationwide said that prices rose by a modest 0.3 per cent in January, the lowest rise since May. Mortgage approvals sank sharply in December to 113,000, from 129,000 in November.

The international economy
Trade-weighted sterling has risen by more than 1.5 per cent since the increase in interest rates in January, and at one point sterling rose above the $1.99 mark. Later in the month, US growth came in at an annualised 3.5 per cent in the fourth quarter, higher than expected and the best rate since the start of 2006.

Rate verdict: uncertain
Last months rate rise, the third in six months, was passed by the slimmest of margins on the MPC, and so most economists now expect the committee to sit on its hands this time. However, rates will rise again if data stay hawkish, and five out of 62 economists polled by Reuters forecast higher rates next week.

Bank thinking

In the past month, Mervyn King has struck a balanced tone. Despite voting to raise rates in January, he said the MPCs central view was still that inflation is likely to fall back in the second half of the year, possibly quite sharply. However, he also gave warning against inflationary pay rises. Andrew Sentance, an external MPC member, has spoken of the need to keep demand constrained and inflation expectations well-anchored. Tim Besley, who has voted three times in five months to raise rates, has said he is concerned that inflation will not fall as fast as the Bank is hoping. David Blanchflower denied being a dove, saying: I am as hawkish as anyone about keeping inflation on target.

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