Is The Old Enemy Back?

Last Thursday saw the Bank of England‘s (BoE) Monetary Policy Committee (MPC) raise rates by 0.25%, taking interest rates up to 5.25%.  A rise in rates had been anticipated, but not so soon into the new year - February being seen as the most likely candidate.   The MPC was apparently spooked by data from the Office of National Statistics, which showed the Consumer Price Index (CPI) was up to 3.0%, on the back of higher fuel costs (an 11 year high).  The same set of data also saw the Retail Price Index (RPI), which is sometimes used during wage negotiations, up to 4.4% from 3.9% in December; this puts RPI at its highest level since 1991.

It‘s been a difficult year for the MPC with the last 12 months seeing 2 members leave the committee, and suffering the death of another.  CPI has been above the government‘s 2.0% target consistently during 2006 and no doubt the BoE‘s Governor, Mervyn King, will be contemplating his written explanation to the government if matters continue.

One has to have some sympathy with the Bank.  Twice in the last 6 months it has acted unexpectedly to counter what it perceives to be an inflationary threat; a threat that now appears to be clear and present.  The members of the MPC must also be conscious that the UK economy has been buoyed by the low cost of borrowing, which has fuelled spending and house price inflation; and that bursting this unsustainable bubble could have serious consequences for the economy as a whole.  Ultimately, it seems, the BoE has to raise rates if it believes inflation poses a threat and the view of Minerva gives even money on another rate rise in March.

Elsewhere in the UK economy, unemployment seems to have stabilised, having crept up over the summer.  The last two months have seen a small reduction in the headline rate, which currently stands at 5.5%.

Finally, with inflation a worry in the UK, data out on Wednesday shows Eurozone inflation to be steady at 1.9%.  The figures out for December are the last for the 12 member Eurozone, before Slovenia is added to the statistics for the January data.

[This section was compiled using data and information obtained from BBC Online, Trustnet.com, M&G Investments and the Office for National Statistics].