Report may see interest rate rise

Aug 8 2007 by Tony McDonough, Liverpool Daily Post

ECONOMISTS will be closely studying the latest Bank of England inflation report, due out today, with many experts seeing interest rates being raised to 6% by the end of the year.

The Bank’s Monetary Policy Committee last week voted to leave rates unchanged after raising them to 5.75% the previous month.

However, analysts anticipate the Bank’s hawkish governor Mervyn King being in favour of a further rise. It is thought he would not want to send a signal that rates have peaked for the time being and risk a further surge in house prices.

Today’s inflation report will, it is hoped, offer a clearer indication of whether more action needs to be taken to steady the UK’s economy.

“We think the projections will not rule out the possibility of a further hike to 6% in the coming months,” said David Hillier, economist at Barclays Capital. “What actually happens to rates will likely depend on the tone of the forthcoming activity data.”

A lot of the data over the next few months is going to be skewed by a lot of special factors.

July was the wettest on record. The British Retail Consortium said that meant people shied away from buying new summer clothing. June retail sales were also hit by the rain as Britons could not indulge their love of barbecues and other summer goods.

Floods in parts of the country in the second half of July will have also hit activity there. But food prices are set to rise because of crop damage. The latest out- break of foot and mouth disease poses even more upside risk to food prices. Meat prices rose sharply when an epidemic occurred in 2001.

Further out, the floods may boost activity as victims are for- ced to buy new furniture and car- pets. The bill for insurance firms is estimated at more than £3bn.

Policymakers are hence likely to stress the uncertainty sur- rounding their forecasts, partic- ularly given the recent turmoil in credit markets around the world.

“We believe the MPC will remain focused on the PMIs, and indicators of housing and retail sales, to assess the impact of past rate hikes. In the case these remain resilient, the committee will likely raise policy rates again,” said Amit Kara, UK economist at UBS.

“If, however, credit market events persist, and raise the cost of capital for UK corporations materially and simultaneously trigger tighter credit conditions for the household sector, the MPC will remain cautious.”

BRITAIN’s latest foot and mouth disease outbreak is unlikely to hamper the economy greatly this year as long as a repeat of the devastating 2001 outbreak is avoided, economists say, but some admit it could drive prices higher.

Two cattle herds in southern England have contracted the virus, triggering a European Union ban on imports of fresh meat, live animals and milk products from Britain.

The outbreak will hurt Britain's £500m-a-year meat export industry, but the situation is a far cry from that six years ago when more than 6m animals were burnt, costing rural economies an estimated £8.5bn.

“The difference is that with the experience of 2001 fresh in the authorities’ minds, the containment and early action may help to nip this incident in the bud,” said Alan Clarke, an economist at BNP Paribas.

If the outbreak were to spread rapidly, affected agricultural industries – already reeling from widespread flooding across England in the last month – could dampen growth in Britain's trillion-pound economy.

tonymcdonough