The balance of their decision may well have been on a knife edge and, despite calls from some sections of the market for a rate cut, this time they were to be disappointed.
The MPC is, of course, tasked with setting interest rates whilst policing the state of the economy at any given time. As ever, this month was no different, with a number of factors working against each other – the general market view that rates would be left unchanged was proved correct. The current consensus – that a rate cut is becoming increasingly inevitable – is tempered by an inability of economists and other interested parties to agree on the timing
For its part, the main indicators which the MPC would have been grappling with during its two day deliberation would have included the following.
Retail sales.
Are consumers continuing to spend regardless, or are the recent strong figures due to heavy discounting by the retailers? Does the situation need to be calmed down? Will the forthcoming (and traditionally strong) Christmas period represent further proof that the consumer is spending heavily or will it represent a swansong before some real tightening of activity during 2008?
Growth (GDP).
The current expectation is for growth in the economy to slow down in the final quarter of this year. The spectre of the US sub prime fallout and the ensuing credit crunch has yet to reveal any impact on growth, although concerns remain that the next few months could be critical.
Housing market.
A dilemma – it continues to appear that London and the South East potentially mask a slowdown in the wider country. Is the decline in mortgage approvals (for example) here to stay? The other concern is the lack of a common standard in measuring house prices – some bodies use asking prices for their figures, others use agreed purchase prices whilst others use final transaction prices. Thus, this important measure of economic health is a cloudy one. There is also increasing evidence that lenders are tightening their credit procedures and are becoming less willing to lend, in light of the current credit concerns.
Inflation.
Currently on target, but pressures remain – in particular, recent spikes in commodities, food prices and the oil price recently brushing highs are all contributing to a potentially damaging set of inflationary figures. The inflation rate in the UK has only recently returned to acceptable levels, after exceeding its 1% variance from the agreed target earlier in the year.
Wider financial markets.
Concerns from the US sub-prime fallout have recently resurfaced. Will this lead to the threat of recession in the US, with a potential knock-on impact to the UK? Will the MPC continue to be wholly independent and ignore the wishes of the markets, unlike the route which the Federal Reserve in the US appears to have chosen to take?
As discussed above, the full fallout from the credit crunch in the UK is a topic of hot debate at the moment and, until the picture becomes a little clearer, it is likely that the MPC may maintain its “wait and see” attitude – as opposed to the more pre-emptive attitude of its US counterpart, the Federal Reserve - perhaps even delaying a potential rate cut until after the strength of the Christmas shopping season is known in early February.
Of course, a raft of weaker economic data could change the situation before the end of the year but for the meantime the consensus remains is that a rate cut is on the cards – but not just yet.
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers