Interest rate monitor: Will the Bank of England cut rates again?
Friday, 28 November 2008 03:23
On Thursday the Bank of England 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 the nine members of the monetary policy committee (MPC) in the run-up to December's meeting.
November's decision
Last month, the Bank of England made the shock move of lowering interest rates by 2.5 per cent to three per cent.
A large cut had been expected as evidence mounted that inflation had started to fall and the economy continued to deteriorate. However, the scale of the cut took analysts and investors by surprise and some feared it was a sign the Bank believed the state of the economy was worse than thought.
In the minutes of the meeting, it was revealed the decision was unanimous - also unusual for the committee - and revealed the Bank is considering further cuts in the future.
The UK economy
Retail
Although there is, as usual, some debate about the actual level of high street sales among analysts, the overwhelming sentiment is one of gloom.
Just 16 per cent of high street retailers told the Confederation of British Industry (CBI) that sales were higher in November compared to last year, while 62 per cent said they were lower.
The resulting balance of -46 per cent is sharply down from October (-27 per cent) and worse than retailers expected (-25 per cent).
The British Retail Consortium (BRC) said UK retail sales values fell 2.2 per cent in October on a like-for-like basis, from last year, when they had risen one per cent. Total sales were lower than a year ago for the first time since April 2005.
The Office for National Statistics (ONS) figures show October's total sales values were up 3.2 per cent on a year ago.
Property
House prices in October declined even faster than in September, setting yet another record rate, according to Halifax, with annual prices down 13.7 per cent.
Nationwide also revealed an annual house prices fall of 14.6 per cent for October, a bigger fall than September.
House prices have now fallen for 12 consecutive months and housing turnover is now at its lowest-ever level, Nationwide said.
Both the Royal Institute of Chartered Surveyors (Rics) and the Land Registry confirmed housing transaction levels had also fallen further over the month.
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 0.5 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.
Consumer confidence
Consumer confidence rose slightly in November to -35 but is still 25 points lower than last year, GfK NOP said.
Rachael Joy in the consumer confidence team at GfK NOP, said: "The consumer confidence index has improved marginally this month, but continues to languish at near record lows.
"The dramatic cut in interest rates this month appears to have done little to improve sentiment so far, as UK consumers continue to fret over the impact of a looming recession."
The index is still only four points off July's record low of -39.
Inflation
After peaking at 5.2 per cent in September, the consumer price index (CPI) fell sharply to 4.5 per cent in October.
Transport costs were the biggest downward pressure, as the price of oil fell dramatically.
The danger is now deflation, according to the Bank of England, which could cause a spiral of lower prices and shrinking demand, potentially leading to more job losses. A cut in VAT from December 1st will also push down prices.
This week's decision.
.is likely to be another cut.
The Bank of England was under extraordinary pressure last month to send a strong signal to the economy.
A surprise 1.5 per cent cut to three per cent certainly achieved this, although there was some debate as to whether it boosted confidence or spooked investors further.
Although the interest rate is now historically low at three per cent - the last time the rate was this low was in 1954 - the Bank has indicated it is prepared to lower it further.
Given that deflation is now considered a greater risk than inflation, there is certainly scope for another cut. It is the size of the cut that is the question.
Traditionally the MPC has stuck to small cuts, but one member - Sir John Gieve - has warned past performance was not a guide to future voting as the Bank was prepared to do whatever was necessary to aid the economy.
A poll of 11 economists for myfinances.co.uk showed analysts are split on the issue, with five going for a one per cent cut, four a cut of half a per cent and two predicting a three quarter percentage point cut.
Again, this month the decision is going to be difficult to call, and it would seem the most likely decision will be to reduce the rate to either 2.5 per cent or two per cent in December.
Sarah Routledge
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