James Mills is a web developer in the North East of England and founder of Refresh Teesside »
Mike Hughes is the Head of Business for the Evening Gazette. He will be blogging on all matters of importance to Teesside businesses - and some that are just worth knowing »
Jez Davison, business writer at the Evening Gazette, is a regular blogger on all things business - particularly finance, entrepreneurship and the state of the Teesside economy » 
Karen McLauchlan is the Evening Gazette's deputy business and features editor - with special interest in all things industry, property and arts related » 
Jeremy Middleton is a venture capitalist and the co-founder of FTSE-200 company HomeServe » 
Deloitte, which has 23 offices across the UK including Newcastle, is among the country's leading professional services firms » 
ClimateNE & Climate Change Schools Project support the move to a low-carbon, resilient economy and help businesses avoid risk and realise commercial opportunities. Posts by Jen Atkinson, Krista McKinzey and Harriet Thew » Roger BootleâÂÂs response to MarchâÂÂs MPC meeting
TodayâÂÂs decision by the Monetary Policy Committee to leave interest rates on hold at 5.25% shows how the CommitteeâÂÂs inflation fears are limiting its ability to respond to the economic slowdown. While interest rates will be cut further, the slow pace at which they are falling will make the economic downturn that much sharper and that much longer. The result will eventually be even lower rates than otherwise. 4% is not a silly figure.
It has become clearer that the economy needs a further dose of policy medicine. With the Nationwide recording the fourth fall in house prices in as many months in February, the news on the housing market has worsened. And with many lenders now refusing to provide mortgages to borrowers without a deposit of 10%, further falls in house prices are on the cards.
WhatâÂÂs more, the housing slowdown appears to be taking its toll on the wider economy. Consumer spending growth slowed from a quarterly rise of 0.9% in Q3 to just 0.2% in Q4. And the GfK survey found that consumers are currently less confident than at anytime since January 1995.
Admittedly, retail sales were fairly robust in January. But the weak tone of FebruaryâÂÂs CBI Distributive Trades survey suggests that this might have been a last hurrah. Finally, investment fell outright in Q4, suggesting that previous interest rate rises, the credit crunch and the deteriorating economic climate have made companies less willing, or less able, to spend.
But the CommitteeâÂÂs ability to support the real economy is restrained by the deteriorating outlook for inflation. Admittedly, CPI inflation rose only modestly from 2.1% in December to 2.2% in January. But this is very much the calm before the storm as the recently announced utility price hikes are set to push inflation up to 2.6% in February and further towards 3% later.
And price pressures towards the start of the inflation pipeline have strengthened markedly. The oil price has risen above $100 per barrel and the latest fall in the pound will put further upward pressure on import prices. Manufacturers are already raising their selling prices at a record rate of 5.7% per annum. WhatâÂÂs more, with the publicâÂÂs inflation expectations still high, the danger that further rises in inflation will become ingrained in the system is growing.
As such, inflation fears mean that the MPC will continue to cut interest rates only gradually. I think that they will be left on hold in April before falling to 5% in May. Such a slow pace of policy loosening will exacerbate the economic downturn. I think that GDP growth will slow to around 1.7% this year and about 1.5% next year, condemning the UK to its weakest period of growth in 15 years. Interest rates might therefore need to eventually fall all the way to 4%.
Roger Bootle, Economic Adviser to Deloitte
- Post to:
del.icio.us
Digg
Newsvine
Nowpublic
Reddit
« Previous | Home | Next »