Hamish McRae: You might grumble, but a rate rise now could soften the downturn when it comes

When markets are surprised, you should ask, what's changed?
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The Independent Online

Well, the interest rate rise came a month early - last week I said to expect it but in February, not January. Sorry about that. But I shall stick with the comment that followed, which was that we should not rule out the possibility of reaching 6 per cent at some stage of this economic cycle.

Indeed that possibility, which a week ago would have seemed a bit outlandish, is now starting to become respectable. The mainstream view seems to be that there will be one more increase in rates, bringing them to 5.5 per cent, probably in April. But that 6 per cent number is cited as a possibility by, among others, Roger Bootle at Deloitte and the economics team at Citigroup.

When the markets are surprised by something, as indeed they were, you should ask what's changed. I suggest two things have: the immediate inflation performance; and the medium-term economic and inflationary prospects. As far as the first is concerned, we will next week get the official measure of inflation, the consumer price index for December, which may have gone above 3 per cent.

The Bank of England's Monetary Policy Committee presumably had a sniff of these figures, and that may explain its action. If the number is above 3 per cent, that would be the highest for a decade and trigger the Bank having to write a letter of explanation to the Chancellor for the first time ever. Arguably, actual CPI is more alarming than core CPI (see left-hand graph above) - for anyone having to pay their heating bills or their council tax, the core CPI is a pretty theoretical number.

In any case the Bank's letter would also have to explain what the Bank would do about future inflation, and I can see some difficulty composing an appropriate draft. It could hardly say: "Terribly sorry, we are almost certainly going to have to increase interest rates next month. But of course we cannot say that for certain because the monetary committee has not had its February meeting and it decided against an increase at the January one."

So we may get the answer next week with the inflation figures. If, on the other hand, the number remains below 3 per cent, then we have to wait another week until the minutes of the monetary committee come out. These will explain why the Bank moved. I suppose even if the CPI remains below 3 per cent, the old retail price index seems likely to go above 4 per cent, and the RPI for all its faults is in many ways a more appropriate index, and more trusted, than the new CPI. Many financial arrangements, including index-linked gilts, still use the RPI, and wage settlements are frequently based on it.

But it will be the second issue, the medium-term prospects for inflation and the economy, that will determine whether we will hit that 6 per cent mark. Viewed historically (right-hand graph), rates at 5.25 per cent are not very high. Leave aside that peak in rates in the early 1990s, when sterling was a member of the European exchange rate mechanism, and focus on the period since 1993. From then onwards through the 1990s, rates were mostly between 5 per cent and 7 per cent. Back in 1996, when inflation was last at its present level, rates were 6 per cent.

So it is not a remarkable level by quite recent historical standards. However, until a couple of months ago it did not seem likely that we would need such a hike in rates. Two things have changed this perception. One is that the present level is not high enough to curb the housing market. The other is that the economy seems to be able to go on growing at or above trend despite these rates, and could probably stand higher ones.

As far as the housing boom is concerned, the important thing to appreciate is that this is not just a "City bonus" thing. The fastest increase over the five years in the value of homes has been in Northern Ireland and the north of England, while the slowest increase has been in London and the South-east. After a pause in 2005, price increases have picked up again.

This cannot go on. That it has gone on so long - with all the implications for affordability and equity - is the result of a failure of monetary policy. This failure has become more evident with the recent pick-up of the market.

As for the economy, well, last year it managed to grow by about 2.7 per cent. Recent figures show a very strong service sector and a not-too-bad manufacturing one. The Government, with its budget deficit at 3 per cent of GDP, continues to provide a further stimulus. It would be wrong to argue that it needs higher rates to slow it down but it certainly seems able to bear the present level without too much pain. Some individuals coping with large mortgages and higher taxation may be feeling squeezed, but the economy as a whole does not show that.

Looking ahead, there are two broad possibilities. One is that there is indeed a global slowdown, led by the US. If that happens our own growth can be expected to slacken through the second half of the year, and we could already be close to the peak of this interest rate cycle.

The other is that the global slackening will not be very evident and that inflation will remain a serious concern. If there is a string of bad inflation news through the summer then this interest rate increase will have to be beefed up with further ones.

Which outcome is more likely? I don't think we can know. My instinct is that growth this year will remain quite strong and the slowdown will come either in 2008 or beyond. But all our experience of forecasting shows that ideas set out confidently in January can look quite wrong by the autumn and that is just an intuitive feeling.

What I am more sure about is that the end of this global economic cycle, as and when it comes, will in some measure be associated with an end to the global housing boom. That may not be entirely a causal effect, for the relationship will be two-way, with falling house prices cutting global consumption, and the slowing world economy cutting house prices.

Meanwhile, the harder the Bank of England leans against inflationary pressures, the better the ability of the UK economy to pull through the downturn when it comes. So a cheer for that decision to raise interest rates last week: not popular but wise.

Becks and our cultural invasion of the US

The Beckham deal is extraordinary in itself but all the more extraordinary for what it says about the growing global trade in culture and entertainment.

The first point to note is that the highest-paid sports star in the US is a non-national, and one who has spent his entire career in the UK and Spain. The second is that he is in a non-American sport, or rather a sport that plays a slightly odd role in US life.

Women's soccer is very popular as a spectator sport but it is also popular in the US suburbs as something that the kids of middle-class families can play without too much danger of being injured. It is both less mainstream but more upmarket in the US than it is in Britain or continental Europe; you could say it is Posh. You can see how the Becks image slots into that mould and why he is so valuable.

But it is the wider implication that seems to me to be most interesting. The unique feature of the US economy for most of the past century is that it has been the only one on the planet which has created a strong popular culture that can be exported to the rest of the world.

Hollywood still dominates world movie exports. British actors and directors can do well, but they have to go to the US to do so - as do other non-Americans. In pop music we sometimes produce winners, but basically that remains a US-led industry. The same goes for the Continent. Johnny Hallyday is great in France (even if he is moving to Switzerland for tax purposes) but he does not export well. The Berlin Philharmonic is arguably the greatest orchestra in the world but that is elite culture, not popular culture. Giorgio Armani is huge in global fashion (second only to US-based Ralph Lauren) but that is top-of-the-range stuff, too.

But recently there have been a couple of signs that the UK may be becoming a more effective competitor. An obvious one is the success of Harry Potter, a genuine global phenomenon. Another is something I came across last week, browsing through the 2007 edition of The Economist's "Pocket World in Figures".

It is that Britain is the world's largest exporter of cultural goods, ahead even of the US. The figures are for 2002 so it may have changed, but then we exported more than $8.5bn (£4.4bn) worth of art, antiques, books, newspapers and cultural services, against the US's $7.6bn. (Yes, you are reading a cultural product.)

I am not sure that Becks's millions will be added to these statistics - after all, he will be over there, not here - but you see the point. A UK star is the mechanism for exporting soccer to the world's biggest consumer market. It fits into a pattern.

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