After the UK rate increase – what’s next?
With the likelihood of base rate increases in the UK on Thursday we’ve been scouring various analysis in the media for hints of whether this will be the last rate increase or not.
A few months ago figures and analysis pointed to the likelihood that rates would increase just one more time at the end of the year and then move downwards in the spring of 2007. But recently the outlook has become murkier as increases in inflation and a surprise surge in the price of UK housing have weighed in to heighten uncertainty.
Victoria Marklew, of the Northern Trust Company in Chicago has put together a raft of data to try and analyze the outlook.
The latest crop of data out of the UK supports the assumption that the Bank of England’s Monetary Policy Committee (MPC) will be hiking the repo rate to 5.0% on November 9. The key question, of course, is whether that will be the last such tightening at this stage in the cycle, or whether one or two additional hikes will be needed next year. At this point, the best we can do is invoke the usual economist’s mantra – watch the data. In particular, watch the inflation, housing market, and labor market data over the next couple of months.
Today’s data hinted that the labor market might be softening. Average earnings growth slowed a tad more in August, rising 4.2% in the three months to August, compared with 4.4% in the three months to July.
Marklew goes on to look at employment figures, which show that September unemployment is at its highest figure (962,000) since December 2001, however the figures don’t yet point to a trend.
Marklew further goes on to note that
Today also saw the release of the minutes from the October 5 MPC meeting, at which two of the nine members voted for an immediate rate hike, arguing that consumption is strong and price pressures are picking up. The other members agreed with this assessment but worried that an unexpected hike would boost market expectations of further moves and so provide "an additional degree of tightening which was not required."
Meanwhile, BoE Governor King continues to state that wage and cost pressures need to be monitored closely, that any dip in inflation at the end of Q3 is likely to prove temporary, and that policymakers need to look beyond short-term fluctuations in oil prices.
Marklew concludes that the only certainty at this point in time is that the outlook for next year is difficult to predict.
Whilst we pointed out yesterday that you can take any set of figures to prove a point, in many cases the relevance of the figures will change according to the time they’re viewed. As an example Marklew’s figures take a strong view on the ‘classic’ vectors for judging the state of the economy. What is ignored in the recent skew in the value of property, which has certainly not been reflected in the CPI figure, but today is not represented well enough in the RPI figures.
Personal debt, high house prices and looming unemployment make for a nasty volatile mixture. With the bank focused on maintaining low inflation the irony is that both personal debt and high house prices will remain a key factor – though whether and by how much the Bank of England’s MPC considers these is open to debate.
Without wanting to sound like we’re belaboring the point too much, we think that personal debt needs to be considered otherwise a recession may be looming, without anyone noticing.
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