UK: Economic Update - Roger Bootle’s response to December’s MPC meeting

Last Updated: 13 January 2005
Article by Roger Bootle, Economic Adviser, Deloitte

Most Read Contributor in UK, August 2017
  • It appears that the Governor of the Bank of England is succeeding in making monetary policy "boring". Not only did the Monetary Policy Committee decide to keep interest rates on hold at 4.75% for the fourth month in a row today but if, as seems likely, all nine members were in agreement, this would mark the longest period of unanimity in the MPC’s history.
  • Given the underlying weak tone of the data released in the last month, it is unlikely that any members considered raising interest rates, or for that matter took the OECD’s recent assertion that interest rates need to rise to 5.75% by the end of 2005 with anything less than a large pinch of salt.
  • To start with, the housing market remains weak. At least one of the two main indices have recorded falling house prices in three of the last four months. And with the number of mortgage approvals falling from 88,000 in September to 83,000 in October – the fifth fall in as many months – further falls in house prices appear to be on the cards.
  • There is also mounting evidence that the faltering housing market is starting to impact on consumer spending. Although the second release of Q3 GDP left quarterly growth unrevised at 0.4%, it revealed that household spending rose by just 0.5% – the smallest increase since Q1 2003. What’s more, the latest evidence suggests that Q4 has got off to a poor start, with the annual like-for-like growth rate of the BRC’s retail sales monitor falling from +0.5% in October to -0.2% in November.
  • What’s more, it is looking increasingly likely that other areas of the economy will not be able to compensate for the slowdown in household spending. Despite encouraging noises from some of the survey evidence, manufacturing output fell by a monthly 0.1% in October. This was the fourth monthly fall in five months and increases the chances that the sector will fall into recession in Q4.
  • And finally, although the recent strength of sterling against the dollar has been more than offset by weakness against the euro, if sterling continues to rise against the dollar there is a distinct danger that the already fragile export recovery will fade away altogether.
  • Accordingly, monetary policy is set to get much more interesting and, dare I say it, even exciting! Although it is still possible that a rebound in consumer activity in the New Year will prompt one more rise in interest rates, the chances that interest rates have peaked are rising all the time. More importantly, it will not be long before a harsh housing market adjustment puts interest rate cuts back on the agenda. For the moment, I am forecasting that interest rates end 2005 at 4.5% and 2006 at 4.0%, but it is quite possible that they will have to go as low as 3%, or even lower.

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