Interest Rates Will Go Up, Not Down
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I was delayed on my way in this morning. By the Luftwaffe. Yes, an unexploded bomb in east London played havoc with the District Line.
Oh, and to the young man who threw a strop at South Kensington – there really was no more room in the carriage. You can’t expect someone to give up their place to you just because you’ve got gelled hair and an expensive tie.
Anyway. To business…
Central banking street fighter Jean-Claude Trichet’s been saying words again. The Times reports this morning that the European Central Bank (ECB) has “issued a surprise warning that surging inflation could force it to lift eurozone rates as early as next month”.
What surprise? Inflation in the eurozone, as in Britain, is a clear and present danger. It’s a real sign of the times that some of us are surprised when monetary policymakers propose to do something about it.
The general expectation is that if the ECB raise rates, the Bank of England will follow. I concur. I also expect our boys to raise rates even if the ECB doesn’t.
Why? Well, the latest Consumer Price Index figures show CPI inflation at 3.0% for the year to April. CPI, of course, is the inflation index against which the Bank of England is judged. It’s the Bank’s job to ensure that the figure never gets above… 3.0%.
Oh. The Bank’s on a knife-edge. And if the ECB does raise rates, the Bank will have to follow. The pound has been taking a hammering in the last year. Against the euro it’s down from around €1.47 to the pound this time last year to €1.25 this morning.
Inflation is the natural consequence of a weak currency. The principal reason for this is that a weak currency makes imports more expensive. This is exactly what’s happening in Britain – everything from food to energy is getting dearer. If the ECB puts its rates up, more money will head into the euro, further weakening the pound. Unless… unless the Bank of England also raises rates. Truth be told, the Bank should raise rates anyway. At July’s meeting they should announce a rise of 0.5% at least.
Not that they will. Because today we have yet more ‘bad data’ from the housing market. House prices are falling twice as fast as they did in the early nineties. According to the Halifax, house prices fell by 2.4% last month, to add to the 1.3% fall we had in April and the 2.5% fall in March.
Since January, the average house is worth 6.6% less. That works out at a not-too-clever £13,000 (Yesterday, Theo took an in-depth look at the housing market, calculating housing’s “P/E ratio”)
So an interest rate megahike is unlikely. But one thing is certain – the Bank of England can’t save the housing market. So it shouldn’t try.
Predictions time! When can we expect rates to start rising? For July, I reckon the Bank will stay put, leaving rates at 5%. Of course, that all depends on a) how much deflationary data we get this month, and how much the Bank can stomach, and b) whether or not the politicians try to meddle, and how successful they are if they do.
Milton Friedman once wrote that inflation is a problem because the more volatile prices are, the less efficient is the price mechanism. Because no-one knows what’s going on.
As he put it: “The broadcast about relative prices is, as it were, being jammed by the noise coming from the inflation broadcast”.
By August I think that noise will become too loud for the Bank to ignore. And then we’ll see some action (though probably only of the quarter-point variety; they’re cautious, these central bankers).
From our perspective, then, it’s as you were. Little succour in sight for the UK economy. But a possible chink of light that the Bank may, by hook or by crook, soon begin to start taking inflation seriously.
That is, if it isn’t too busy wrangling over the nice shiny ‘present’ the Chancellor wants to give them…
Darling, you shouldn’t have!
It’s always the quiet ones you should watch. They may be meek and demure, but they can have fiery tempers.
Sure, Bank of England Governor Mervyn King might look like a public school bursar, but if you push him too far, he might just kick off.
The Bank has its Monetary Policy Committee to oversee prices and inflation. Alistair Eyebrows thinks it needs a similar committee to look after “financial stability”.
Eyebrows wants to “bring in outside expertise to assist the Governor”.
This is just a bit of niggle, isn’t it? Another move calculated to wind King up… to what end I’m not quite sure.
But the Treasury wants to be careful. Because I don’t think they’ll like King when he’s angry…
Why Manraaj Singh is like Bruce Lee
OK, I’ll come clean – I only wrote that headline because I watched Enter The Dragon last night. And because Manraaj was telling me about China this morning (which is why the phrase ‘Enter The Dragon’ popped into my mind).
But now that I think about it, Manraaj is a bit like Bruce Lee…
Only, instead of dedicating his life to the perfection of martial arts – as Lee did by developing Jeet Kune Do – Manraaj’s ‘Tao’ is the world of overseas investing.
He’s made it his mission to turn this exciting field into a highly polished art form. And believe me, Manraaj has investment moves that leave most financial experts clutching their portfolios in pain…
Today, he’s looking at China. And he’s playing it through Africa.
Confused? I was… at first. But then the man himself explained it:
“If you’ve got something, and China wants it – pow! It’s profit town!”
Africa has A LOT of stuff that China wants. And Manraaj knows what that stuff is, where it is and – most importantly – how to invest in it!
Find out how you can pack your portfolio with all the power of a Bruce Lee flying kick – starting with an investment in the new King of African Oil… Pages: 1 2
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Tags: , Bank Of England, Consumer Price Index, CPI, ECB, inflation, Inflation Index, interest rates, International, Jean-Claude Trichet, South Kensington