Recent increases in oil prices, ever climbing food prices, and the demand on commodities such as medal, plastic, and rubber is sure to push inflation close to 5 per cent in the near months. Currently it stands at 3.7 per cent which is closer to 5 per cent than it is to the Bank of England’s goal of 2 per cent. The Bank of England’s Monetary Policy Committee (MPC) will be voting to push the current 0.5 per cent interest rate upward or leave it alone. Compared with what was expected just one month ago, things have changed in a short time to make the possibility of a hike more likely within the first quarter than not.
Inflation is putting pressure on the MPC to react versus choosing a wait and see if it takes care of itself as many analysts believe. Should inflation hover close to or below 4 per cent then the MPC would likely wait out the time and see if the tax increases and public spending cuts pulled inflation back toward goal range. However, with the recent oil price increases which effect more than just the oil price but also the cost of bringing products to market as well as the cost of raw materials it is a new game than what was being faced at the point of the January MPC meeting.
A recent Reuter’s poll of 67 economists showed that 21 of them believe the rate will increase by the fourth quarter. The City forecasts a one-in-five chance the MPC will raise the rate at the February meeting but that odds are higher for a rate increase later in the year.
“We expect the MPC twill leave rates on hold at the upcoming meeting but it may be a much closer call than many expect,” said Michael Saunders at Citi. “We expect that inflation will stay above target for an extended period, not just this year but probably 2012 and 2013 as well.”
MPC member Andrew Sentance has for many months been voting for a double increase on the rate bringing it to 1.0 per cent. Last month new member Martin Weale joined him for the vote to increase the rate. What pushed many to raise an eyebrow that perhaps an increase was closer than farther down the calendar year was the comment made by Charles Bean, the Deputy Governor, that should oil prices go beyond a particular level that the rate would need to be hiked to control the growth of inflation.
Philip Shaw, chief economist at Investec, said: “Given the voting pattern at last month’s meeting, it would take a swing of three members to tip the scales in favour of a hike [today]. Is this feasible? In our view it is not impossible, but it does not look likely.”
Many analysts are worried that an increase in the rate will halt the fragile recovery in process and have warned that the MPC should consider it well when voting. There was a contraction in the economy at the end of December which though unexpected was blamed on the severe winter weather at the end of the year. Indeed there was a rebound in January, but business groups including the British Chambers of Commerce have warned the MPC to hold steady and allow the economy to gain strength before halting recovery in its progress by an increase in the rate.
Mr. Shaw added: “Unless the economy is roaring away, raising interest rates just at the point when spending cuts are beginning to bite and taxes are rising again (albeit modestly) is a dangerous thing to do. Indeed with budgetary issues still very much in his mind, we suspect that this explains much of Mervyn King’s reticence to raise rates.”
Related posts:
- Latest MPC Minutes Reveal Rate Increase was Closer than in Month’s Past
- Newest Member of the Bank’s Rate Regulation Committee Views Increase a Necessity
- Bank of England Leaves Base Rate at Record Low for Another Month
- Despite Inflation Hovering Above Goal MPC Leaves Base Interest Rate Unchanged in February
- Bank of England’s Monetary Policy Committee Leaves Base Interest Rate and Quantitative Easing Unchanged in Start of 2011
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