Interest rate monitor: Will the Bank of England cut rates?
On Thursday 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 November's meeting.
October's decision
Last month, Gordon Brown told the UK of the 0.5 per cent rate cut to 4.5 per cent as part of a coordinated move by the Federal Reserve, the European Central Bank and the Bank of England.
Although a cut was widely expected as governments around the world attempted to halt the financial slide, the emergency rate cut a day before the official announcement took everybody by surprise. The half percentage point cut was also out of character for the central bank, which usually deals in quarter-point cuts to promote stability.
The UK economy
Retail
There has not been a massive improvement in sales this month, as consumers prepare themselves for a recession and retailers face a lean Christmas.
According to the CBI's Distributive Trades Survey for October, half of all retailers (50 per cent) said that the volume of sales in the first half of October was down on last year, and 23 per cent said they were up.
The resulting balance of -27 per cent matches September's rate of decline and was in line with firms' expectations. No improvement is anticipated in November, with a balance of 25 per cent expecting sales to fall.
The British Retail Consortium (BRC) warned retailers will struggle in the run-up to Christmas, reporting a 1.1 per cent decline from the previous month in September. The Office for National Statistics (ONS) said September's total sales values were up three per cent on a year ago, above the BRC's one per cent figure.
Property
House prices are still falling at record rates, although month-on-month falls have moderated slightly.
Nationwide's house price index shows house prices fell by 1.4 per cent in October, less than the 1.7 per cent fall in September. However, the annual fall increased to 14.6 per cent, bringing the price of a typical house in the UK to £158,872.
Meanwhile, the latest report from Halifax finds house prices in the UK property market fell by a record 13.3 per cent year-on-year in September.
The Royal Institute of Chartered Surveyors (Rics) said the net balance of surveyors reporting falling rather than rising prices edged lower from -81.8 to -84.2 in September. Transaction levels also fell to a new low of 11.5 per surveyor over the last three months.
Data from the Land Registry for September - picking data from sales - values the average home at £168,814, an eight per cent drop from last year.
The September figures represent a 2.2 per cent drop in prices from the previous month.
With housing demand clearly down and prices still falling, there is still pressure from the housing sector to cut rates.
Economic growth
The UK economy shrank for the first time in 16 years between July and September, figures from the Office for National Statistics show.
The UK's GDP contracted by 0.3 per cent over the third quarter, bringing the country closer to recession. If the fourth quarter growth is also negative, the UK will have been in recession since July.
The stark figures fuelled calls for another rate cut in November to support spending.
Consumer confidence
Following a slight rise in consumer confidence in September, optimism has now fallen back to August levels.
According to the monthly survey from GfK NOP, confidence in October is back down to -36, after rising to -32 in September.
Rachael Joy in the consumer confidence team at GfK NOP, said: "Consumers are not at all confident about buying major purchases as rising food and energy bills leave them increasingly worried about keeping up with payments, and saving has also seen a considerable drop, possibly due to fears of the safety of savings, as well as straightened resources as household bills increase."
Inflation
The consumer prices index (CPI) annual inflation rose to a 16-year high of 5.2 per cent in September, up from 4.7 per cent in August, as rises in gas and electricity bills took effect.
Electricity price inflation rose to 30.3 percent year-on-year, while gas inflation rose to 49.9 percent, up from 27.7 percent in August, the ONS said.
Despite the high figure - the government's inflation target is fixed at two per cent - analysts predicted inflation has reached its peak. Oil prices have now halved since their July high of $147 a barrel and some economists are warning the real danger now is deflation.
This week's decision.
. is too close to call. We put see a 50/50 chance of a 0.25 per cent cut or a 0.50 per cent cut.
The Bank of England is under pressure from all sides to cut rates further and analysts expect the interest rate to fall to four per cent by the end of the year. This could either mean a 0.5 per cent cut in November, or a quarter point cut now and another in December. In ordinary circumstances, the MPC prefers to lower rates gradually, to inspire stability in the economy.
But this time the committee is under such extraordinary political pressure - with the chancellor, Alistair Darling, publicly reminding the members of their remit to support the economy - that a larger cut may be on the cards.
Sarah Routledge
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