Rate rise likely after election
ECONOMICS - THE WEEK IN VIEW
Sunday 09 March 1997
It is not yet clear, though, that this will be sufficient to prevent a rise in interest rates of a half percentage point soon after the formation of the new government.
The producer price index published tomorrow is a reliable indicator of future inflation. Prices that manufacturers pay for their raw materials are expected to have fallen 6.1 per cent in the year to February after a decline of 6.2 per cent in January.
The rise in the pound of more than 15 per cent since the beginning of last August is one of the main reasons why prices are falling. The threat of increased competition from imported goods is expected to have dampened manufacturers' price increases to as little as 1.4 per cent.
"During February, the pound rose by one and a half percentage points on its trade-weighted index, suggesting a further drop in the cost of imported goods," said Philip Shaw, chief economist at Union Discount.
The producer price index has fallen for the last four months but this has yet to feed through into retail prices. The underlying rate of inflation, which excludes home loans, remains stubbornly stuck above 3 per cent, in excess of the Government' s target of 2.5 per cent. The approach of the general election has kept rates on hold in the first quarter of the year even though Chancellor of the Exchequer, Kenneth Clarke, said last week the prospect of a general election within months wouldn't prevent him from raising interest rates.
"The belief that politicians can't change interest rates before an election is old-fashioned nonsense," Mr Clarke said.
No one expects him to act on his word. Mr Clarke has consistently pointed to the deflationary effect of the strong currency to back his decision to keep rates unchanged at 6.0 per cent.
"I am reassured by the exceptional lack of inflationary pressures in the pipeline," he said last week.
Since the end of the Second Wold War, British interest rates have been raised just twice in the six months before a general election - in 1955 and 1979.
Economists are now focusing on what will happen to rates once the general election, now less than two months away, is over.
The latest opinion polls last week showed the Conservative party was trailing Labour by 26 percentage points, the worst ever rating recorded by a governing party in the final weeks of a parliament and further evidence that 18 years of Conservative government are drawing to a close.
A Labour government is expected to demonstrate its commitment to economic prudence. Shadow Chancellor Gordon Brown has said an incoming Labour government will adopt the current inflation target of 2.5 per cent or below, pointing to an early rise in rates.
"I expect a rise of 50 basis points in June," said Andrew Milligan, chief economist at GA Investment Management. "Rates should be flat after that until the year end on the assumption that fiscal policy is tightened in the Budget."
However, some investors are starting to scale back their expectations on rates.
"The consensus view has been that rates will be raised immediately after the election but the market is starting to question whether the case for higher rates is really that strong," said Richard Morrissey, senior bond analyst at McCarthy, Crissanti & Maffei.
In addition to falling import prices, oil has also declined, with the price of Brent crude down by 20 per cent since the beginning of January. Recent anecdotal evidence from CBI surveys suggest diminishing price pressures in retail goods.
The retail price index for February will be published on 20 March. Copyright: IOS & Bloomberg
- 2 The West has it totally wrong on Lee Kuan Yew
- 3 #FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
- 4 Scientists have discovered a simple way to cook rice that dramatically cuts the calories
Germanwings captain Patrick Sondenheimer tried to break into locked cockpit door 'with an axe' as plane was descending
Amanda Knox murder conviction: Italian court overturns verdict for US student and Raffaele Sollecito in the killing of Meredith Kercher
Saudi Arabia says it won't rule out building nuclear weapons
The battle for the Middle East's future begins in Yemen as Saudi Arabia jumps into the abyss
#FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
Nigel Farage brands LGBT activists 'filth' and 'scum' and accuses them of scaring away his children after they invade his local pub
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Russia threatens Denmark with nuclear weapons if it tries to join Nato defence shield
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Germanwings plane crash live: Co-pilot Andreas Lubitz wanted to 'do something people would remember him for'
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...