Bank rate rise hangs in balance

Quarterly inflation report and Consumer Price Index (CPI) hold key to rise or freeze. Ray Boulger, senior technical manager of John Charcol comments:

“February’s Bank Rate is tough to call due to two key factors, even though the money markets are factoring in two rate rises peaking at 5.75% between now and the summer. Members of the MPC will already know the stats from January’s CPI report, as they did last month (December’s), as well as the Quarterly Inflation Report which traditionally has been when Bank Rate changes have been sparked. If the CPI shows any further rise above the 3% target, not only will Mervyn King be required to write a letter to the Chancellor explaining why inflation has risen above 3% but we may well see Bank Rate increase by another 0.25% for the second month running, taking it to 5.5%.

“However, there are already early signs of a slowdown in the rate of increase in house prices. January’s shock rate rise, coupled with the talk of another increase, is putting further pressure on home buyers and prospective purchases. The housing market doesn’t need a further increase in Bank Rate to slow it down, with Nationwide showing a 0.3% fall in real house prices for January, although the reported seasonally adjusted figure was a 0.3% rise.”

Boulger continues: “If the stats gathered throughout January / early February suggest the MPC should increase Bank Rate they will have to balance this with the risk of hitting the economy with too much deflationary pressure too quickly, particularly bearing in mind that the impact of the November and January increases is largely not yet obvious. The MPC is expecting a significant fall in inflation in the second half of the year, as the impact of lower energy bills takes hold and last year’s energy related increases fall out of the year on year comparison. However, the recent increase in the oil price back up to just under $60 a barrel is unhelpful here.

“On balance the odds seem to favour Bank Rate being unchanged this month, but it will be a close call.”