Bank of England policymakers were split three ways for the second meeting in a row at their interest rate-setting meeting earlier this month.

Minutes of the meeting showed seven members of the Bank’s nine-strong rate- setting body voted to hold rates at 5%.

However, Timothy Besley voted to increase rates to 5.25%, while David Blanchflower voted for a cut to 4.75%.

The minutes showed most wanted to hold rates because although inflation was rising, growth prospects had worsened.

Rate dilemma

In recent months, the Bank of England’s Monetary Policy Committee (MPC) has faced tough choices over the level of UK interest rates, with the economy experiencing both accelerating inflation and slowing growth.

Latest figures showed CPI inflation hit 4.4% in July, more than double the 2% target rate. However, the UK economy grew by just 0.2% in the second quarter of the year.

There was more worrying news for the Bank on Tuesday as a survey suggested that Britons’ inflation expectations were running at their highest level for 16 years.

The latest Barclays Survey of Inflation Expectations found inflation was expected to be at 4.8% in two years’ time, the highest reading since comparable records began in 1992.

“The tone of the discussion confirms that the interest rate debate remains finely balanced for now” Jonathan Loynes, Capital Economics

The minutes of the August meeting showed the MPC considered the pros and cons of raising, holding and cutting rates.

It noted that a rise in rates would “send a strong signal to wage and price setters” that the Bank would not allow inflation to remain above the 2% target rate for long.

However, it also noted that a rate increase could hit business and consumer confidence, making a downturn “unnecessarily deep”.

Against this, while a rate cut might prevent the worst of any downturn, it could increase the risk of “elevated inflation persisting”.

Most members of the MPC concluded that the current level of rates was “broadly appropriate”.

The committee noted that in the past month, while news on economic activity had continued to worsen, news on the inflation outlook had been more mixed, with oil prices falling.

Recession warning

“The tone of the discussion confirms that the interest rate debate remains finely balanced for now, with most members concluding that the outlook for growth had worsened, but that the risks to the inflation outlook remain on the upside,” said Jonathan Loynes, chief European economist at Capital Economics.

“Accordingly, there is little here to suggest that other members are about to join Blanchflower in voting for a cut in the very near future,” he added.

“Nonetheless, with inflation close to a peak and the economy heading towards recession, we still think rates could be falling by year-end and will eventually drop much further than the markets expect.”

The British Chambers of Commerce (BCC) said it expected rates to remain at 5% for the next two to three months.

“However, we remain convinced that the threats of recession are more immediate and severe than the risks of higher inflation,” said David Kern, economic adviser to the BCC.

“Once it is clear that inflation has peaked, the MPC must cut rates without delay in October or November.”

News reported by The BBC

The price of oil climbed, reversing earlier falls, on the back of the weakening dollar.

US light sweet crude added $1.16 to 114.03 a barrel, while in London, Brent crude added 99 cents to $112.93.

The dollar weakened against the euro after official US data showed inflation was quickening, helping push up oil and other commodities such as gold.

Investors tend to buy commodities as the greenback weakens because it makes such investments relatively cheaper.

Earlier in the day, oil had fallen below $112 a barrel after Tropical Storm Fay avoided oil operations in the Gulf of Mexico.

Other commodities to rise on Tuesday included nickel, used largely for making steel, which climbed 7.3% to end at $19,395 a tonne.

“The market is going to be fairly close to balance rather than being oversupplied, and there is the prospect that the stainless steel market will recover in the next few months on a year-on-year basis,” said Dan Smith, analyst at Standard Chartered.

And copper for delivery next month added 12 cents to $3.4350 per lb in New York.

Commodities are seen as safe investment when inflation pressures are increasing.

Future falls?

Though oil prices have risen, they are far from the record of more than $147 a barrel reached in July.

And analysts are predicting that oil could fall given the current economic slowdown dents demand.

US figures due out on Wednesday expected to show a rise in stockpiles, underlining the decline in demand.

Meanwhile last week’s figures from Opec hinted that global demand for oil is set to slow.

The oil cartel’s monthly report predicted global oil demand would grow by one million barrels a day in 2009 – 30,000 barrels lower than its previous forecasts, and its lowest growth since 2002.

But current geopolitical tensions in Georgia, where Russian troops are pulling out of the region, and in Pakistan, following President Pervez Musharraf’s resignation, are likely to support prices, experts added.

News reported by The BBC

The number of homes and apartments being built in the US sank in July to the lowest level in more than 17 years, government figures show.

Builders started work on 965,000 properties, on an annualised basis, from 1.08 million in June, the Commerce Department said.

However, this was not as bleak as some had been expecting.

Separately, inflationary pressures saw US wholesale prices shoot ahead by 1.2% in July – its fastest pace in 27 years.

Core inflation, which strips out energy and food costs, climbed by 0.7% from June, the Labor Department said, well above the the 0.2% rise which had been forecast.

The rapid wholesale inflation seen in July was largely linked to energy costs during the month, which saw crude oil hit a record price of $147.27 per barrel, sending petrol prices soaring.

But there are hopes that prices rises will abate, now that the price of oil has fallen by more than $30 per barrel.

“Though commodity prices have come down significantly from record highs in mid-July and the dollar has strengthened, consumers can still expect to see increased inflation for some time to come as the producer price pressures feed through to consumer prices,” said Arek Ohanissian, an economist at the CEBR.

Grim

Economists have been studying forward-looking information for signs that the US housing slump was past its worst.

However, the Commerce Department data made for grim reading, with the number of construction permits issued – seen as a reliable sign of future activity – down 17.7% on an annual basis.

And the number of new homes being constructed last month was down by 39.2% compared with July 2007.

“The continued weakening of the housing market is an additional pressure and households will feel further squeezed in terms of real disposable income,” said Mr Ohanissian.

He said that “given this state of affairs and the general weakness of the economy” the Federal Reserve was likely to keep interest rates low at 2% – despite rising inflation.

News reported by The BBC

Baggage handlers and check-in staff at Gatwick and Stansted airports are to strike on Bank Holiday Monday in a row over pay, unions say.

At Gatwick, 318 Swissport workers will walk out for 24 hours, halting services at some airlines. A second strike is planned for Friday 29 August.

The staff have rejected a 3% pay offer which the Unite union said was “an insult” and well below inflation.

Workers from two unions at Stansted have also voted to strike.

Unite said industrial action could spread to other airports in the coming weeks.

Workers at Manchester Airport will put the decision to a vote on Monday, and further ballots are expected later at Birmingham and Newcastle airports.

Unite members working for Swissport at Stansted will be joined by 30 members of the GMB union when they walk out on Monday 25 August and Friday 29.

The GMB members, who work for Airfield Services screening baggage for Ryanair and easyJet, have rejected a 1.5% pay offer.

Cost of living

Unite has more than 300 members at Gatwick, 72% of whom voted in favour of striking. They want to see a pay increase of more than 5%. This pay offer is an insult to professional, hard working men and women

Steve Turner, Unite

Airlines including Virgin Atlantic, Monarch, Thomson Fly and First Choice would be affected if the action later this month went ahead.

National officer Steve Turner said: “Our members are already struggling to keep up with rising food and energy costs.

“This pay offer is an insult to professional, hard working men and women who have to operate in extremely difficult conditions.

“Our members have had enough. The liberalisation of ground handling services across UK airports has resulted in a race to the bottom which must and will stop.

“We will not stand back and allow labour costs to determine whether contracts are won or lost.”

‘Minimise disruption’

Swissport said it was aware that a “small number” of its staff were planning to strike.

A spokesman said: “Swissport believes that a fair offer has been made to the unions in the light of the current economic climate that reflects the cost of living increase.

“Swissport is working with the airport operator and the customer airlines to minimise disruption to the travelling public.”

Gary Pearce, from the GMB, said the Stansted workers were due a pay rise last January but their employers had been “dragging their feet”.

“These workers are doing one of the most vital jobs in the airport but are among the lowest paid,” he said.

In January, planned strikes at Gatwick and six other airports were called off after BAA eased plans to alter workers’ pension rights.

News reported by The BBC

Pakistan’s currency has hit a record low against the dollar on speculation that President Pervez Musharraf might be on the verge of resigning.

The Pakistan rupee fell to 76.9 to the dollar on Friday, the fourth consecutive trading day it has hit an all-time low.

The currency has weakened on fears that the president faces impeachment.

Inflation in Pakistan is at its highest in 30 years, the trade deficit is widening and reserves have fallen.

The value of the rupee has dropped by 23% this year.

“It’s panic and the central bank is not doing anything,” one trader told the Reuters news agency.

Some investors say intervention by the central bank is needed to bolster the currency, but given its lack of capital this would be hard.

Mr Musharraf, who was involved in a coup that toppled former Prime Minister Nawaz Sharif in 1999, is being threatened with impeachment by Pakistan’s new ruling alliance.

News reported by The BBC

India’s cabinet has approved higher wages for government workers after the recommendations of a pay panel report earlier this year.

The higher wages for 5 million workers will cost 221bn rupees ($5.2bn;£2.77bn) in 2008/09.

It comes as Indian inflation soared faster than expected in early August to a 13-year high of 12.44%.

“The cabinet has approved the pay commission report,” law minister Hansraj Bhardwaj said.

Deficit target

Analysts have said extra borrowing may be needed to pay for the wage increases, placing pressure on public finances.

But finance minister Palaniappan Chidambaram said India would meet its fiscal deficit target for 2008/09 despite the pay increase.

The wage hike had been taken into account when preparing the budget for the financial year starting in April 2008, he said.

The pay rises are to be backdated to January 2006, with the government paying back money owed in two stages – 40% during 2008/09, and 60% in 2009/10.

Minimum pay

About 157bn rupees of the 221bn rupees total will come from the federal budget, and the remainder from the railways, which has its own budget.

The minimum basic monthly pay for a government worker will be increased to 7,000 rupees and the total monthly package, including allowances, will be increased to a minimum 10,000 of rupees per month.

Annual inflation moved to 12.44% for the week ending 2 August, from 12.01% for the week ended 26 July, according to the Wholesale Price Index.

The inflation rise exceeded analysts’ expectations of around 12.2%.

News reported by The BBC

The world’s largest retailer, Wal-Mart, has reported a 17% rose in quarterly profits after US shoppers heading to its stores in search of cheap goods.

Wal-Mart said net income in the three months to 31 July rose to $3.45bn (£1.8bn), up from $2.95bn last year.

It also upped its full-year earnings outlook, with shoppers expected to seek low prices on food and other items in the face of inflation worries.

Wal-Mart’s UK arm, Asda, said like-for-like sales excluding fuel were up 5.5%.

The UK’s second-largest supermarket said its market share rose 0.6% to 12.3% in the 12 weeks to 13 July against the same period a year ago.

Handily placed

US prices rose by 5.6% in the year to July, the fastest inflation rate for more than 17 years, according to figures released on Thursday.

A number of large retail brands suffered a drop in sales during July, but observers have suggested that Wal-Mart is better-placed than many retailers to ride out the tough times.

Wal-Mart said food, health-care and electronic products are in demand at its stores.

“What we see, as do many around the world, is a global economy that is difficult,” said Wal-Mart chief executive Lee Scott.

“When energy and oil prices go up on top of inflation and health care and core food items, there’s a great deal of pressure on the customer,” he added.

News reported by The BBC

The pound has fallen further against the dollar, hitting its lowest level in almost two years amid fears the UK will fall into recession.

Sterling touched its lowest level since October 2006 at $1.8617 but later bounced back to $1.8736.

Measured against a basket of trade-weighted currencies, the pound is now at its weakest level since 1996.

The pound dropped sharply on Wednesday after the Bank of England issued a gloomy assessment of the UK economy.

The fall in sterling will hurt holidaymakers who have benefitted from a strong pound when travelling overseas- and make it more expensive for people to buy second homes abroad.

However, it could help exporters whose goods will be cheaper overseas.

The Bank’s governor Mervyn King said economic growth would be flat for the next year or so and that inflation would rise to 5% or above before falling.

But with domestic demand weak, a revival of exports could help the economy and limit job losses.

Rate cuts

Economists had thought inflation would prevent the Bank of England from cutting rates, but the Bank’s suggestion that inflation will begin to ease raised expectations of interest rate cuts and this hit the pound.

“We have long argued that sterling has been significantly overvalued in recent years” Jonathan Loynes, Capital Economics

Lower interest rates mean investors get lower returns on sterling deposits, which makes the pound less attractive.

Simon Derrick, currency strategist at Bank of New York Mellon, described the pound’s fall this week a “dramatic collapse” that recalled the aftermath of sterling’s ejection from European Exchange Rate Mechanism (ERM) in 1992.

However, he said the currency’s slide should begin to ease.

“Even within the most ferocious sterling downtrends in the past, significant corrections emerged in the middle of the moves,” he said.

But Jonathan Loynes, chief European economist at Capital Economics, thinks the pound could fall as far as $1.65 by the end of 2009.

“We have long argued that sterling has been significantly overvalued in recent years,” he said.

Deteriorating outlooks

Recent official figures have already shown the UK is struggling with high inflation and faltering growth.

Fears about European growth have also helped the dollar bounce back from record lows.

The US economy is still reeling from the credit crisis but analysts say the deteriorating outlook elsewhere in the world has given the dollar a boost.

Falling commodity prices have also supported the US currency. Investors had bought gold and oil to protect against dollar weakness and are now unwinding their positions.

The euro was trading at $1.4910 on Thursday, slightly above the 6-month low of $1.4815 struck this week. Earlier this year, the euro was trading at $1.60.

The euro has been further undermined by the military conflict in Georgia.

News reported by The BBC

The Bank of England is likely to provide evidence of tougher times ahead for the economy when it publishes its latest quarterly report on inflation.

The report comes after the UK’s annual rate of inflation rose to 4.4% in July, its highest level since 1997.

Analysts said the Bank is likely to predict that inflation could touch 5% before falling back, leaving no scope for an early cut in interest rates.

Jobs data, also due later, is expected to show a rise in those out of work.

Vicky Redwood, an economist at Capital Economics, said it looked possible that inflation could reach 5% this year before easing. She said the Bank’s Monetary Policy Committee could also cut its economic growth forecasts for next year.

“While we are in no doubt that the committee will cut interest rates aggressively once inflation has shown signs of peaking it would be understandable if it did not want to signal that rate cuts are imminent just yet,” she said.

News reported by The BBC

Water firms in England and Wales are presenting draft spending and pricing plans for the five-year period starting from 2010 to regulator Ofwat.

Thames Water expects bills to climb by about 3% a year above inflation during the period, while Northumbrian Water said its rise would be 1.3% above.

United Utilities plans to raise prices by 2.7% above inflation.

And Severn Trent said prices would rise “only slightly above inflation,” but did not give a figure.

Major investments

Welsh Water said household bills would rise only at the rate of inflation, as it announced plans to invest £1.5bn, or £1,000 per household, on average during the period.

The money will be used to protect the quality of the water, support new infrastructure, improve water treatments and reduce the risk of repeat sewer flooding to properties.

The firm’s average household bill will be £390 before inflation.

United Utilities said its capital investment for the period would be £4bn, of which £1.6bn would be for water services while £2.4bn would be for water waste services.

While the firm said it would increase prices by 2.7%, bills were tipped to rise by 2.1% on average thanks to greater use of water meters.

However it added that it would reassess its costs when it submits its final plan to Ofwat in 2009 “in light of financial market conditions at that time”.

Severn Trent said it would invest £3.2bn to deliver improved services, reinforce the network following last summer’s flooding and reduce sewer flooding. It also said the money would be used for environmental improvements.

Tony Ballance, the firm’s director of regulation and competition, said: “We believe our draft plan provides the best balance between improved services, the needs of the water environment and a cost that customers are willing to pay”.

“We have to make sure that our infrastructure, our networks, our treatment works are all ready to cope with [an] influx of people” Peter Antolik Thames Water director of regulation

Thames Water, the UK’s biggest water company, said its £6.5bn investment plan would be the largest spending programme carried out by a UK water company.

The firm said its customers had “enjoyed the lowest bills in the industry for many years”, and while there would be “an inevitable impact on bills”, it would try to keep charges below the industry average.

Peter Antolik, Thames Water’s director of regulation, told BBC Radio 4′s Today programme that the money was vital to improve London’s ageing water system.

All water firms are submitting draft plans to Ofwat

“We also have, it should be remembered, a growing population in London and the south east,” he said.

“We have, we estimate, about 380,000 more people coming in to the region and we have to make sure that our infrastructure, our networks, our treatment works are all ready to cope with that influx of people.”

Customer concerns

Tony Smith, chief executive of the Consumer Council for Water said the customers were giving the message that they want the service to be maintained.

“They want a safe, reliable water supply, they want an effective sewerage system but above all, they want prices not to go above inflation.”

The watchdog will decide whether to allow above-inflation price rises at a time when customers are being hit by other rising bills.

“This is the start of the process of making decisions on how each company proposes to provide value-for-money, long-term, high-quality water services to its customers,” said Ofwat chief executive Regina Finn.

“We will now examine draft business plans in detail, checking the proposed level of service and investment.

“We will make sure each plan includes everything we expect, takes account of concerns expressed by customers, and does so as efficiently as possible.”

Ofwat is due to make its final decision by November 2009.

Ofwat said in February that average bills across England and Wales would rise by 5.8% this year, with increases of 8% in some areas.

The regulator has said increases in bills are projected to be 42% in real terms by 2010 since the privatisation of the water industry in England and Wales in 1989.

News reported by The BBC