C&G for Intermediaries - Press area

March 2008

Economic review by C&G Head of Intermediary Sales

I imagine many homeowners will have been left a little heavy hearted following last week’s decision to hold interest rates at 5.25. February’s cut, coupled with the sharp rate drops announced by the US central bank, may have artificially raised some consumers’ hopes that we would be enjoying a succession of cuts throughout 2008. But the Bank of England had clear reasons to call a hold, as inflation is once again rearing its ugly head.

The latest decision from the Monetary Policy Committee (MPC) is no doubt a move to keep rising prices in check. Consumer price inflation has already edged beyond its two per cent target – and the last thing Mervyn King will want to do is write yet another open letter to the chancellor explaining why the three per cent target has been breached for the second time in a year.

Consumers’ pockets are certainly feeling the strain of rising prices and this will have undoubtedly influenced last week’s MPC decision. Wholesale costs have risen rapidly, as oil has shot up 62 per cent in a year and wheat prices stand at a record high. Our own research shows that consumers believe prices are higher now than this time last year, and feel costs will continue to creep upwards well into 2009. This pessimistic view matches official data issued back in February which showed consumers expect CPI inflation to be at 3.2 per cent in twelve months time versus 3.1 per cent back in January.

The boardrooms at Threadneedle Street will make pretty interesting viewing over the coming months, as the MPC has a tricky juggling act on its hands. With consumers clearly feeling the pressure of price rises there is a need to put the brakes on inflation. However, this has to be balanced with the need to manage the risk of an economic downturn with further interest rate cuts. But cutting rates when inflation is hovering above its target would call into question the bank’s credibility and controlling inflation has to be a priority for the Bank of England.

As a result, sharp interest rate cuts are likely to remain on the other side of the Atlantic, with the financial markets revising earlier outlooks for cuts later in the year. On our side of the pond at least, it looks increasingly probable that interest rates are close to bottoming out in the next few months.

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