Bank of England shows lack courage to act on interest rates

With the vision of the old cartoon character Mr Magoo the Bank of England played it cool and decided to hold rates in the UK at 4.75 percent. Although the reasons for the decision will be released later, it was considered the chances were 50/50 that rates would hold or rise this time.

Whilst many were predicting the increase in rates to happen in November, recent inflation and house price increases have caused concern that the economy is splitting in two directions and that metrics such as CPI do not reflect the true nature of growth and expenditure in the UK anymore.

Even though oil and other energy prices have eased, some of the benefits of the lower prices will not filter through for many months to the consumer. At the same time the growth in consumer debt has hit all time highs. It should be remembered that for example that a £1million mortgage does not equal £1million wealth, it really means £1million debt. Also, as has been widely reported in the past few weeks’ credit card and other unsecured debt is nearly twice that of the UK’s other European neighbours.

The BBC quotes a representative from the CBI, calling for increases in rates.

The CBI business group said that while oil prices had fallen from record highs in July, there were other pressures on inflation.

"With the economy growing solidly but on course to slow next year, business will hope that when the Bank does make its move, it will be well signaled, and that one increase will be enough to keep inflation well controlled through 2007," said Ian McCafferty, the CBI’s chief economic adviser.

The Bank of England is tasked with containing inflation – based on the ‘flawed’ CPI measurement – to 2 percent, though the UK Office of National Statistics shows inflation running at 2.5 percent in August, up from 2.4 percent the previous month. Even the Bank of England itself has warned that inflation may grow to 3 percent next year.

So why not raise interest rates now, why not ‘prick’ the spend, spend, spend habit that the public have learnt to adopt now? Well it looks like we’ll have to wait for the publication of the MPC meeting minutes to find that out. Sadly, we think the weakness in the decision will drive house prices and debt upwards, making any eventual correction all the more painful.

Perhaps we’ll be back to the ‘boom and bust’ days that the Chancellor Gordon Brown promised to put behind him.