European and UK Interest rates – no shocks expected

The London stock market fell ahead of the announcement at noon of whether interest rates will remain at 4.5 percent or rise. The sentiment across the board is that the rates will be put on hold, though recent economic figures suggest that there may be reasons to act now and raise interest rates. Meanwhile in Europe rates are expected to rise as the EBC meets, with the main bourses falling as well.

An increase in UK rates would come as a significant suprise, given the MPC voted 7-0 for no change last month and minutes of this meeting signalled the case for a rise was not even discussed. Bank of England governor Mervyn King and deputy governor Sir John Gieve have appeared to signal in recent speeches that they are in no rush to increase rates.

Even though recent increases in energy costs have pushed raw material costs, factory gate prices, and consumer prices index inflation higher, King has gone out of his way to highlight the potential for mounting fuel bills to dampen consumer spending growth. Such a dampening would have a downward impact on inflation – and yet at the same time inflation figures for June are expected to show it shot up to 2.5 percent – half a percent above the MPC’s own target.

With the committee currently down to seven members (from its normal nine) there are no expectations of a radical change in policy decisions.

In Europe the latest inflation data cemented a widely held belief that the European Central Bank will raise rates to 3 percent on Thursday.

The market has seen its biggest weekly gain since March 2003, so a pause is due whilst the rates are announced this week.

According to Reuters, Andrew Bell, equity strategist at Rensburg Sheppards said – ‘I think it’s just a little bit of profit taking after the last couple of weeks recovery, at the margin, the UK housing data (is) a bit stronger, so it reinforces the idea that there is probably an interest rate increase somewhere around the corner here.’

Our view has consistently been that the MPC needs to raise rates as soon as possible, otherwise there will be need for a greater correction later in the year or beginning of the next year. The Bank of England needs to take the heat out of the housing market, which is beginning to inflate again. A sharp correction in that market (ie bursting of the bubble) will lay waste to the UK economy for a much longer period.

Of course the really the Fed’s next meeting on the 8th August will be the one to watch.