Thursday, May 10, 2007
Bank hikes to 5.5%, warns of risks
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee hiked Bank rate by a quarter to 5.5%, as expected, but also warned that the inflation risks in the medium-term were on the upside of the 2% target.

Here is its statement:

"The Bank of England’s Monetary Policy Committee today voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.

In the United Kingdom, output growth has remained firm. Business investment has been stronger than expected and, although indicators of consumer spending have been volatile, the underlying picture is one of steady growth. Credit and broad money continue to grow rapidly. The pace of expansion of the international economy remains robust.

CPI inflation picked up to 3.1% in March. Lower gas and electricity prices and weaker import price inflation mean that CPI inflation is likely to fall back to around the 2% target in the course of this year. But the margin of spare capacity in firms appears limited and there are signs that businesses are more able to push through price increases. Relative to the 2% target, the risks to the outlook for inflation in the medium term consequently remain tilted to the upside.

Against that background, the Committee judged that a further increase in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.

The Committee’s latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 16 May.

The minutes of the meeting will be published at 9.30am on Wednesday 23 May."

Comments

Dear David,
The MPC’s central inflation projection (February 2007 Inflation Report) for the 2nd quarter of 2007 is 2.56% (in line with the market’s prediction). The central projection drops to 2.06% by the end of 2007. The Inflation Report also records an inflation risk which is lower than what the central projection suggests. Today’s statement changes all the above. It hints that the May Inflation report (next week) will revise upwards the central projection and the risk of inflation in the medium term; this leaves room for speculation that another interest rate increase is likely during summer.
Many thanks

Posted by: Costas Milas at May 10, 2007 04:06 PM

With the statement still predicting a fall in CPI back to around 2% this year, surely one more hike as implied by the futures markets should be the peak in rates? Or do you think we get more? I think the "risks remain to the upside" narrative is a red herring - with inflation at 3.1% now, how could they say anything but that....

As for songs for Gordon Brown to enter to - "Send in the Clowns" seems very appropriate - looking forward to getting my prize!

Regards

Posted by: Simon at May 11, 2007 08:09 AM
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