Rate rise likely after election

ECONOMICS - THE WEEK IN VIEW

The general election campaign is likely to get under way in an inflation environment that is more favourable than at any time for a generation, statistics this week are expected to show.

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

News
people
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film Ridley Scott reveals truth behind casting decisions of Exodus
News
people
Sport
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
PROMOTED VIDEO
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
filmThe singers widow and former bandmates have approved project
News
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
tv
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
music
News
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
people
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
News
ebooksNow available in paperback
News
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
News
i100
Life and Style
Fright night: the board game dates back to at least 1890
life
Environment
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

Day In a Page

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?