Bank of England joins the throng and ups rates
The Bank of England raised interest rates by 25 basis points to 5 percent this afternoon. The move was not unexpected as despite recent decrease in oil prices the CPI only eased marginally from 2.5 percent in August to 2.4 percent in September. Worries remained that the broader Retail Price Index (RPI) increased from 3.4 percent to 3.6 percent.
The increase follows hot on the increase in Australia, where the Reserve Bank of Australia (RBA) moved rates up 25 basis points on Tuesday to 6.25 percent.
The Dollar came under pressure after the governor of the Bank of Japan; Toshihiko Fukui hinted that rates might double from 0.25 percent to 0.5 percent in the near future saying, "We must not take a long time to adjust policy interest rates, waiting for inflation to build up" would cause sharp swings in the economy.
Fukui went on to say "Our task is to carefully take action before these conditions appear in order to achieve price stability and keep future economic swings gradual.”
The Dollar was later supported by comments from the US Fed’s Michael Moskow hinting that the likelihood of rate decreases were not existent and that inflation is a much larger risk than an economic slowdown.
Moskow was quoted as saying “My current assessment is that the risk of inflation remaining too high is greater than the risk of growth being too low,” at a meeting of the Ball State Business Forecasting Roundtable in Muncie, Indiana, repeating remarks he made Nov. 6. “Some additional firming of policy may yet be necessary to bring inflation back to a range consistent with price stability.”
The next meeting of the FOMC, the Fed’s rate setting meeting is set for 12th December.
In Europe the European Central Bank (ECB) voted at the beginning of the month to keep rates steady at 3.25 percent, though the expectations are that the rates will increase in early December at their next meeting, followed by a further increase in January.
Commenting on today’s UK increase Vicky Redwood, UK economist at Capital Economics said, "This move was widely expected, but the key question is whether we see another rise early next year,"
She went on to say that "Either way, with interest rates 50 basis points higher than six months ago, it could be a contributing factor to deterring people from entering the housing market over the next few months."
Our suspicion is that it will require a higher than 50 basis points rise to cool the enthusiasm of British householders for overpriced property. With the round of more imminent rate increases in early 2007 and the added impact of winter fuel bills, we suspect a slowdown may take place by March.
At that point the ‘British disease’ of spending and speculating on property may be curbed.