A glimmer of hope for hard-pressed businesses and homeowners emerged from the latest minutes of the Bank of England Monetary Policy Committee (MPC) – with some observers predicting a cut in interest rates by the end of the year as inflation eventually subsides. It came on a day of yet more gloomy news on the economy,

At its last meeting, the MPC voted by seven to two to keep rates on hold at 5 per cent, with one member, Tim Besley, voting for a quarter percentage point rise and another member, David Blanchflower, opting for a quarter percentage point reduction, as he has for some months.

This three-way split repeats the pattern seen in July, but observers detected there was more thought given this time to the merits of reducing rates immediately. While balanced, the minutes welcomed signs that inflationary pressures were easing – especially the 15 per cent fall in the oil price. The MPC was also encouraged by the muted level of wage settlements and inflationary expectations.

David Page, an economist with Investec, said: “The seemingly softer tone to the Committee’s discussion, in keeping with a more muted outlook in the Inflation Report, does seem to have pretty much ruled out any prospect of a rate hike (which was already slim) as it would risk an ‘unnecessarily deep’ downturn.”

Amit Kara, of UBS, said: “Although we envisage the first rate cut next year, there is every chance that the MPC begins to cut as early as November, especially if commodity prices continue to fall and economic activity falters, as expected.”

Evidence that the economy is indeed faltering mounted yesterday. The Bank’s own Agents Survey, drawing on impressions from regional representatives, noted that “concerns about demand were a more important factor in restraining investment than restrictions in the supply of credit, although credit was becoming harder to obtain”. Consumer spending on “big ticket” items, such as televisions and cars, and on eating out is being hit especially badly.

The CBI added to the downbeat mood as its Industrial Trends Survey put business sentiment at a seven-year low. Nor was there much cheer from the beleaguered housing market: the Council of Mortgage Lenders announced gross lending for house purchases running 27 per cent lower than it was a year ago.

News reported by The Independent

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 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

The UK’s annual rate of inflation rose to 4.4% in July, its highest level since records began in 1997.

The 0.6% rise was also the biggest monthly change since records began and took the figure to more than twice the government’s target.

The rise in the Consumer Prices Index (CPI) was more than expected, with food prices up a record 13.7% on the year.

Inflation as measured by the Retail Prices Index (RPI) – often used in pay negotiations – rose to 5% from 4.6%.

Rates question

The latest figures are set to make the next interest rate decision by the Bank of England’s Monetary Policy Committee even tougher, with the Bank having to cope with accelerating inflation and a slowing economy.

“It is very disappointing data with widespread signs of higher price pressures,” said Philip Shaw, Investec chief economist.

“The threats of recession are worsening” David Kern, BCC

Many economists expect that rates will have to be cut by 2009 if the economy goes into a tailspin.

Figures released on Tuesday suggested that the summer sales had made little impact in reviving retail sales, while house prices and mortgage approvals continued to tumble.

Stagflation

For the Liberal Democrats, Treasury spokesman Vince Cable warned about the dangers of stagflation.

“It’s very clear that we’re in for a dose of stagflation, with the economy slowing abruptly and inflation too high and increasing.”

But Yvette Cooper, the Chief Secretary of the Treasury, said that inflation was a problem everywhere due to high oil prices and a lack of supply.

Rising food and fuel prices have hit the Colquhoun family from County Durham hard

She said that the government had cut taxes by £4bn to provide short-term help to families, and was encouraging energy independence as the long-term solution.

Conservative Party leader David Cameron said the inflation figure was “yet another worrying signal for families desperately trying to make ends meet”, adding that “the most important concern up and down the country is the deteriorating state of our economy”.

While prices are still on the increase for consumers, economic activity is slowing in all key sectors of the economy, business confidence is waning and falling house prices and tight credit conditions have dented consumer spending.

Inflation drivers

The jump in inflation from 3.8% to 4.4% was the biggest monthly change in the annual CPI rate since records began in January 1997.

Food prices soared by a record 13.7% over the year mainly as a result of surging meat prices – particularly bacon, pork and poultry.

Surging meat prices played a major part in driving inflation higher

High petrol prices also helped to push up inflation as the data was collected before the recent drop in oil prices.

Looking ahead, CPI inflation is expected to rise even higher as recent utility price rises take effect, with the International Monetary Fund predicting it could hit 5%.

The head of the biggest public sector union warned that his members were increasingly angry over the 2% pay deals imposed by the government.

“The government’s unjust public sector pay policy means that (our members) are having to cope with the biggest rise in inflation since records began on a real pay cut,” said Dave Prentis, General Secretary of Unison.

Interest rate hints

Experts will be eyeing the keenly awaited Bank of England’s Inflation Report, due out on Wednesday, for indications of where interest rates are headed.

But, many analysts do expect some respite to come either late this year or early 2009 as price pressures ease up.

Figures released on Monday showed input prices for manufacturers fell by 0.6% in July, while oil and metals prices have fallen from their peaks in recent days.

The British Chambers of Commerce also warned that the Bank should move to cut rates as soon as possible.

“The threats of recession are worsening,” David Kern, economic adviser to the BCC said.

“Although it is difficult for the Monetary Policy Committee to consider rate cuts while inflation is still rising, it should not hesitate to cut rates later in the autumn once it is clear inflation has peaked.”

News reported by The BBC

The Bank of England has told us it faces the toughest economic challenge in decades.

Now we know it is split three ways over what to do about it.

The old joke says that if you ask five economists the same question you will get six different answers.

It is not such a laughing matter when there are three different answers from the experts striving for the correct response to such troubled times for the economy.

More acute

There has been only one other three-way split in the Monetary Policy Committee’s 11-year history.

And that was in May 2006 when the UK’s economic problems were not nearly as acute as now.

The minutes of the July meeting of the MPC reveal how members were tugged in different directions.

The rapid acceleration in inflation was troubling enough.

But the possibility that the economic slowdown would turn into something worse was weighing equally heavily on the meeting.

The minutes acknowledge that the decision to hold rates at 5% was a “difficult” one.

These minutes lay bare the painful dilemma facing the MPC.

Inflation is heading north and well away from the target of 2%.

Cutting interest rates now would appear at odds with the Bank’s inflation fighting remit.

But acting tough now runs the risk of pushing the economy into recession and dragging inflation below its target a year or so down the line.

Anchored expectations

One member, Tim Besley, a well known inflation hawk, voted for a quarter percentage point rise in rates.

For him an immediate increase was needed “to keep medium-term inflation expectations anchored and ensure the Committee’s credibility”.

The Bank’s David Blanchflower has continued his calls for a rate cut

But another, David Blanchflower, with a long track record as a dove, felt the “activity data had been uniformly gloomy…and activity now seemed likely to contract sharply in the near term, possibly for several quarters”.

The other seven members of the MPC opted to hold rates.

They noted that inflation was likely to move higher and growth slow more markedly than they thought at the time of the May Inflation Report.

They also argued that a rate change would be easier to communicate at the time of the next Inflation Report, due in August.

More to come?

So stand by for another knife-edge interest rate decision next month.

By then there will be more data on the extent of the economic slowdown and the Bank will have updated its inflation forecast.

The economic climate could well have worsened but there may yet be another three-way split.

News reported by The BBC

The stock market tumbled to its lowest level since 2005 yesterday as grim news on inflation and the worsening financial crisis in the United States hit shares.

Inflation jumped to 3.8 per cent in June, nearly double the Bank of England’s 2 per cent target. The bigger-than-expected rise intensified fears that the Bank would not be able to cut interest rates to stop the economy slipping into recession. Inflation is now running at the fastest pace since the Bank gained independence over interest rates in 1997.

Andrew Sentance, a member of the Bank’s Monetary Policy Committee, warned that living standards would be squeezed and unemployment would rise as the Bank battled to keep inflation under control. He said the Bank was worried that expectations of higher prices would cause inflation to become entrenched as it did in the 1970s.

The Bank of England will be watching today’s labour market data carefully for any signs that average earnings are on the rise.

The Chancellor, Alistair Darling, urged people not to push for higher wages, saying it would only lead to a wage-price spiral. “Whether you are in the private sector or the public sector, whether you are sitting in the boardroom or working on the shop floor, we cannot allow inflationary wage increases,” he said.

Sterling hit $2.0153, its highest against the US dollar for three-and-a-half months, and the pound also rose against the euro.

There was more bad news for the key housing and retail sectors. The Royal Institution of Chartered Surveyors’ survey for June pointed to further house price falls in the months ahead, with sentiment in the property market near record lows. The British Retail Consortium said May’s jump in sales did not last and that retail sales fell last month despite deep discounts to get shoppers through the door.

The FTSE 100 dropped 2.4 per cent as bank stocks hit a 10-year low. Royal Bank of Scotland was the biggest faller, dropping 7 per cent to a new low for the year as fears increased over the housing market in the US, where RBS is the biggest foreign bank.

Ben Bernanke, the chairman of the US Federal Reserve, told Congress that his concerns about economic growth and the threat of inflation had intensified. Shares of Freddie Mac and Fannie Mae, the companies that guarantee or own nearly half of the US’s $12trn mortgages, slumped again as doubts about their future persisted despite the federal government’s rescue plan announced on Monday.

The Dow Jones Industrial Average fell by more than 2 per cent but recovered to trade up slightly by lunchtime in New York after the price of oil tumbled 5 per cent. The fall eased concerns about rocketing energy prices but was caused by an expected drop in demand from the US economy.

News reported by The Independent

Between a rock and a hard place – the Bank of England’s predicament as described by increasing numbers of pundits around the City of London.

And it’s an uncomfortable position as the Bank opts for a third successive hold on 5% rates at its latest monthly meeting.

The rock is inflation, well above the Bank’s 2% target, now at 3.3% (by the CPI measure) and set to head above 4% later this year.

The hard place is the looming possibility of recession with all that means for jobs and economic output.

The Bank’s remit is to keep inflation to its target range and to set policy accordingly. With that in mind a cut in interest rates would have been difficult to justify.

“We won’t get the minutes of the latest MPC meeting till Wednesday 23 July… it will make interesting reading”

The bank’s governor, Mervyn King, has expressed his concerns about a wage/price spiral developing with above inflation pay settlements forcing up prices.

He and his eight colleagues on the Monetary Policy Committee (MPC) will need time to assure themselves that the surge in international food and oil prices has not generated this sort of “second round effect”.

Three-way split?

But the nagging worry for the MPC is that the evidence of a slowdown seen in recent weeks points to something worse, namely a steep contraction in growth in the second half of this year.

Business sentiment has soured in recent weeks. Expressions like “fallen off a cliff” have been heard in relation to orders and sales, and not just in the housebuilding industry.

The Bank of England has made it clear that a growth slowdown and squeeze on living standards is the price that will have to be paid if inflation is to be forced back into the bottle.

A slowdown is one thing but a prolonged period of negative growth is not part of the Bank’s game plan. Such an outcome would bring inflation down with a bump, quite possibly requiring a letter to the chancellor explaining why it was too far below target.

Professor David Blanchflower has hitherto been the one member of the MPC consistently calling for lower rates. For him, a housing and consumer slump in line with the US is the biggest risk to the British economy.

But several of his colleagues have admitted to considering the case for higher interest rates because of the inflationary threat.

We won’t get the minutes of the latest MPC meeting till Wednesday 23 July. It will make interesting reading. There could have been a three-way split between rate cutters, holders and raisers. Feathers could have been flying in a clash between hawks and doves.

Predicting an MPC meeting vote is an entertaining parlour game. But it’s not so much fun when the stakes for the economy are so high.

News reported by BBC