Interest rate monitor: Where will the Bank of England go?
Thursday, 02 October 2008 04:24
On Thursday October 9th, the Bank of England's monetary policy committee (MPC) announces the outcome of its monthly meeting deciding whether to lower, hold or raise interest rates. Sarah Routledge assesses the current economic situation to work out what might be running through the heads of its nine members in the run-up to October's meeting.
September's decision
Last month the MPC opted to hold interest rates at five per cent for the fifth month running. This time, the decision was a two-way split, with David Blanchflower lobbying for a 0.5 per cent cut and everyone else voting to hold.
The reasons for the interest rate freeze were similar to those in August. The economy is still slowing and a recession is looking likely but inflation is still far above the Bank's two per cent target.
The UK economy
Retail
David Jones, the former chairman of Next, said this month the retail sector is experiencing its worst recession he has ever known and there seem to be few willing to contradict him.
The CBI Distributive Trades Survey reveals 48 per cent of firms reported sales in the first half of September lower than a year ago, while 21 per cent saw them rise.
The resulting balance of -27 per cent marks a third consecutive month of sharply contracting sales, but is better than firms had feared (-42 per cent), and is an improvement on the survey record low in August (-46 per cent).
There was more disagreement between the British Retail Consortium (BRC) and the Office for National Statistics (ONS) figures. The ONS said August's total sales values were up 3.9 per cent on a year ago, well above the weak 1.4 per cent shown by the BRC's figures.
Results from high street retailers released this month - including JJB Sports and marks & Spencer - show most are suffering, as stores struggle with higher costs and falling demand.
Property
Nationwide's house price index shows house prices fell by 1.7 per cent in September, the same level as in August. The annual fall now stands at 12.4 per cent, bringing the price of a typical house in the UK to £161,797.
Housing demand fell further in August although house prices improved slightly, the Royal Institution of Chartered Surveyors (Rics) said. Over the last three months, the average number of transactions per surveyor has fallen to 12.7, the lowest figure since the property survey began.
Average house prices fell by 4.6 per cent in August to £174,493, the sharpest fall since the Land Registry survey began. House prices in England and Wales continued their downward trend in August, falling another 1.9 per cent from July to prices last seen in spring 2007, the agency said.
According to the Council of Mortgage Lending (CML), gross lending totalled an estimated £21.8 billion in August, a 12 per cent fall from July and a 36 per cent fall from August 2007.
With housing demand clearly down and prices still falling, there is still pressure from the housing sector to cut rates.
Construction and manufacturing orders
A sharp fall in new orders during September led to a further contraction in the construction sector. The Chartered Institute of Purchasing and Supply index for September fell to 38.8, from 40.5 in August. The Office for National Statistics said in a separate release private housing orders fell by 48 per cent over the three months to August, compared to last year.
The survey also showed that price inflation is still high but has fallen further since its June peak.
Within the manufacturing industry, the CIPS index fell to a record low of 41, with the consumer goods sector the worst hit.
Roy Ayliffe, director of professional practice at CIPS, said: "Given the unprecedented chaos in global economies, there was little respite for UK manufacturers in September as the sector suffered the worst operating conditions so far recorded in the survey's 17-year history."
Input inflation also eased for manufacturing, the survey showed.
While the sharp falls in these industries will not improve the state of the economy, the easing of inflation may be enough to persuade the Bank of England that inflation is less of a risk.
Consumer confidence
Consumer confidence improved slightly for the second consecutive month in September.
The overall index score in September has increased four points to -32, although this is still twenty-five points lower than this time last year.
Rachael Joy in the consumer confidence team at GfK NOP, said: "Looking at the overall trend, I'd say we're seeing a tentative lift in UK consumer confidence, although we're still at the levels not seen since the 1990s recession.
"The indication is that people are coming to terms with the thought of living through a depression."
In addition, Lloyds TSB consumer barometer for August shows consumers believe the rate of inflation will rise to five per cent, up from 4.8 per cent in July.
Job security fears intensified in August, falling again to a new survey low.
Inflation
The consumer prices index (CPI) annual inflation rose to 4.7 per cent in August, up from 4.4 per cent in July, as rises in gas and electricity bills took effect.
Food inflation continued to move upwards, reaching a record 14.5 per cent on the year, up from 13.7 per cent in July.
The rise triggered yet another letter to the chancellor from the Bank of England's governor Mervyn King.
This week's decision.
.will be to cut the rate by 0.25 per cent. A month is a long time in finance and although inflation is still a major concern for the monetary policy committee (MPC), the financial crisis has taken a turn for the worse.
After quick action by the government to sell HBOS and nationalise Bradford & Bingley, there will be added pressure on the MPC to take steps to improve conditions. Banks have been tightening their criteria for loans even further and the loss of several high street banks has shrunk competition on the high street.
The MPC will be considering the possibility the economy will weaken to the extent that inflation falls below the two per cent target. An interest rate cut was widely expected at the end of the year anyway but recent events may well convince the committee to bring this forward.
Sarah Routledge
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