Economics: The week in view: How strong is the Old Lady?

Markets

The Bank of England's monetary policy meeting this week will focus attention on the outlook for UK rates. The Bank has made clear its views that interest rates need to rise, but investors wonder if the Bank's new monetary policy committee yet has the authority to push through a change in rates on its own.

Even though the Chancellor of the Exchequer, Gordon Brown, announced last month he was granting the Bank of England freedom to set rates, legislation securing the Bank's right to do so is not yet in place.

The Bank has no doubts. "We have complete and total authority to decide interest rate changes, as set out in a letter from Gordon Brown to the Governor," a spokesman said.

But investors are less convinced that the committee will be free to change rates when it meets on Thursday and Friday.

"There is a lack of clarity about the new committee's ability to take unilateral action," said Robin Aspinall, the chief economist at National Australia Bank. "That creates doubt over interest rate decisions, at least in the short term. I don't think anyone is convinced the committee could do anything more than recommend to Brown to raise rates."

Amid this uncertainty, Mr Aspinall doesn't believe the Bank will decide to raise interest rates this week. And most City economists agree with him.

"This is clearly a system in transition," said Simon Briscoe, senior UK economist at Nikko Europe. "The markets are blinded by the EMU saga. But if they weren't, we could see gilts suffering from the uncertainty surrounding all the policy decisions being made.

"The Treasury's decision to move so quickly has not helped build credibility," said Mr Briscoe.

Mr Aspinall agrees. "Gordon Brown's honeymoon with the City is just about over and there are growing question marks over his style," he said.

Among the uncertainties are who the members of the committee will be and how soon they will have a voice in deciding rates. While three of the nine are in place, the Treasury has yet to announce the others. Copyright: IOS & Bloomberg

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