UK Interest Rates could Rise in February

By: Nadeem_Walayat

Word is out on the street that another interest rate hike could occur in a matter of days, barely weeks after the last rate rise.The source of recent speculation is a result of research by BDO Stoy Hayword which suggests the increase in inflation pressures may force the Bank of England to raise interest rates later this week.

The Market Oracle has been forecasting a target for UK interest rates of 5.75% by Late 2007 for sometime (UK Interest Rates could rise to 5.75% in 2007 7th Nov 06), with our forecast for early 2007 of between 5.25% to 5.5% (Interest rate trend uptrend accelerates 11th August 06) virtually spot on. However a rate rise to 5.50% in February would imply the possibility of our target of 5.75% could now be exceeded.

So what is the real chance for another interest rate rise in February ?

Inflation is definitely strengthening, as CPI hit 3% for December 06, and RPI soaring ahead at 4.4%, which is more representative of the actual level of inflation experienced by people. It was this expectation that led to the last rise from 5% to 5.25%. The Bank of England knows failure to contain inflation at 3% CPI would result in loss of confidence in its handling of monetary policy. Therefore should inflation expectations for January be for a further surge then the Bank of England just might raise interest rates to 5.5% this week.

This would give a warning to the market, that the Bank of England will keep raising interest rates aggressively to bring inflation under control, and thus the aim would be to bring wage rises under control as companies are squeezed.

There are three problems with the Banks current strategy.

1. Globalisation has weakened the ability of Central Banks to control monetary policy through interest rates. The evidence of this is the effect of the carry trade, where institutions and individuals can borrow at low interest rates abroad to invest for higher returns in their local economies.

2. The Commodities Bull Market - Despite recent correction in the energy complex, commodities still continue to show signs of being in a secular long-term bull market, which means increasing inflationary pressures.

3. Emerging Economies - The impact of emerging economies on the price of goods is more governed by inflationary pressures in the local economies than in the UK, With both wage and goods and services inflation rising in the emerging markets well beyond 6%, this is being exported abroad.

All of three of these factors contribute to UK Money Supply running along at near 15%, this is very inflationary, and as a consequence the rate rises to date have had little impact. Likewise another rise is not going to have much impact. Therefore increasingly our once seen as radical forecast of 5.75% by late 2007, is increasingly looking as rather mild, especially if the Bank of England goes ahead with another rise this week. If not this month, then watch the inflation figures for January a CPI of 3.1% would mean an automatic rate rise in March.

By

Nadeem Walayat

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