Tuesday, August 22, 2006
MPC gropes for the right rate
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Anybody listening to Mervyn King presenting the Bank of England's inflation report earlier this month might have come away with the perception that the decision to raise rates was a "no-brainer", though the governor also emphasised that many outsiders had expected a knife-edge decision. The vote was clear-cut at 6-1 but the discussion, summarised in the minutes here was closely argued. The one dissenter, David Blanchflower, emphasised the increasing amount of slack in the UK labour market.

It is quite hard to detect from the minutes an urgency to raise rates again soon. One section refers to the uncertainties about the impact of energy prices not being resolved until well into 2007. Another uncertainty is whether the second quarter strength of consumer spending was a blip. As Geoff Dicks argued, standing in for me in The Sunday Times, the consumer may again hold the key.

Comments

David,

Geoff Dick's article suggests that the BoE will be heavily influenced by consumer confidence/spending when considering the next interest rate move.

Is it not the case that with the second round inflation effects of oil price hikes potentially looming and a growing perception that inflation is on the rise and fast, the BoE won't (or shouldn't) give any heed to consumer confidence and/or house prices when setting interest rates?

Cheers

Tom

Posted by: Tom at August 22, 2006 03:32 PM

Tom,

One of the uncomfortable things the MPC had to confront was the absence of second-round effects, particularly in the labour market, so a lot of the case for higher rates was based on the sterngth of the economy, partly as a result of the Q2 rise in consumer spending. So this will be important going forward, though so too will be perceptions about inflation.

You raise an interesting point on this. Inflation expectations rose earlier this year but had fallen back by the time the MPC raised rates. It will be interesting to see whether some of this "inflation is really 10%" nonsense in the papers has an upward influence on inflation expectations, and in turn on interest rates.

Posted by: David Smith at August 22, 2006 07:47 PM

The half a million influx of workers will no doubt be damping down any wage inflation risk that may have otherwise existed.

Interesting to note we have concurrent rising employment and unemployment.

As for the oil price, I'm a sceptical that geopolitical pressures will dissolve any time soon. For example, Iran appears to be growing in influence.

A number of papers are circulating the 'another rate rise before the year is out' idea. In addition the FED may have the odd one or two rate rises up its sleve.

Posted by: Werewolves at August 23, 2006 02:31 PM

P.S.

Which version of the word grope did you intend David?

verb 1 feel about or search blindly or uncertainly with the hands. 2 informal feel or fondle (someone) for sexual pleasure, especially against their will.

Quoting the Oxford dictionary (online: www.askoxford.com)

Ha ha...

Posted by: Werewolves at August 23, 2006 06:14 PM
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