Interest rate monitor: April decision

Next week the Bank of England meets to set interest rates, Sarah Routledge examines the issues involved.

In a month where mortgage rates have been rising amid credit crunch pressures, and good deals have been dropped as lenders become oversubscribed, the Bank of England faces a mixed picture.

Predictions of slower growth mean the Bank's monetary policy committee is being pushed to cut interest rates to boost the economy. However the members will have the threat of rising inflation firmly in their sights.

We assess the current economic situation to work out what might be running through the heads of its nine members in the run-up to April's meeting.

March's decision

Last month the MPC opted to hold interest rates in a decision that surprised nobody. Minutes from the meeting revealed only two members voted for a cut in rates, with everyone else voting to stay put. Despite many indications of an economic slowdown, the central bank's primary concern remains keeping inflation to its two per cent target. A sharp rise in energy costs and increased food bills are pushing up the cost of living, and the Bank of England is watching carefully to make sure these rises do not lead to higher wage expectations.

The UK economy

Retail

Official figures from the Office for National Statistics (ONS) show retail sales rose slightly from January to February boosted by better volumes at food stores. Total sales volume rose one per cent from January to February and also rose by one per cent for the quarter, following 0.7 per cent growth in the three months to January. But early results are showing signs of a disappointing Easter for retailers. Financial shocks have dented consumer confidence, while snow, wind and rain conspired to keep shoppers at home. According to data from retail analysts SPSL, footfall for the entire holiday fortnight fell 9.2 per cent against the Easter break last year.

Property

The house market is still not showing any signs of picking up and looks unlikely to do so. House prices in the UK fell by 0.6 per cent during March, the latest Nationwide house price index has shown. According to the nation's second-largest mortgage lender, price growth is now at its slowest rate for some 12 years. The Royal Institute of Chartered Surveyors (Rics) has not released figures for March yet, but did confirm a drop in demand from new buyers in February. Meanwhile, mortgages are becoming harder to secure as more banks withdraw their products, and in the case of First Direct, their entire range.

Manufacturing

Production output slowed from December to January by 0.1 per cent while output price inflation rose, the latest figures from the ONS show. Mining and quarrying output decreased by 4.1 per cent and energy supply output decreased by 0.2 per cent. Meanwhile, the Confederation of British Industry (CBI) has downgraded its 2008 outlook for UK growth and forecasts even slower growth in 2009. In its latest quarterly economic forecast, the UK's business group has lowered its figure for this year's rate of GDP growth down 0.2 per cent to 1.8 per cent.

Consumer confidence

UK consumer confidence has dropped to an all-time low in February amid cost-of-living increases and uncertainty over the housing market.

The Nationwide Consumer Confidence Index fell three points to 78, with the present situation index - a measure of how consumers feel about the current economic and employment situation - registering the biggest drop, from 83 in January to 76 in February.

Inflation

Inflation rose to 2.5 per cent in February from 2.2 per cent in January as soaring energy bills took effect. Figures from the ONS show the consumer prices index (CPI) annual inflation is now half a percentage point above the government's two per cent target. In its last inflation report, the Bank of England said it expected inflation to reach three per cent before it started to come down again.

Next week's decision…

… is a difficult one to call. Analysts are divided over whether the Bank of England's Monetary Policy Committee will vote to cut interest rates to support the slowing economy, or hold steady at 5.25 per cent to ward off inflation. Since the central bank's last decision, more trauma in the financial markets including the near-collapse of Bear Stearns and a panic over the liquidity of HBOS has sent shares in the FTSE 100 plummeting. House market prices continue to slide and mortgage lenders are withdrawing products, signalling more gloom for the property market.

Recent speeches from members of the committee include comments which appear to support gradual cuts in the interest rate to find the best balance for the economy, so a quarter point cut may be on the cards – but the higher rate of inflation published this month means this could be put off, at least until next month.

Sarah Routledge