Outlook: Drama to come in MPC soap opera

THE Threadneedle Street soap opera otherwise known as the Monetary Policy Committee now has its very own claque. In the real thing, these are members of the audience drawn together in a highly organised unit and paid to clap loudly or boo and hiss as they see fit. In the case of the MPC's monthly interest rate meetings, the claque consists of an unlikely collection of industrialists, trade unions and engineering trade associations.

The climax to the MPC's latest two day performance has kept the claque happy. Interest rates have stayed put. But it is not content with that. It will be in the audience again next month and this time the noises off will be designed to produce a cut in rates.

The markets also suspect that that the next movement will be down. Sterling slipped below DM2.90 yesterday to close at its lowest for three months and bonds rose. The markets are betting that next week's Bank of England inflation report will paint a relatively benign picture on inflation, even though it need to factor in the impact of the Chancellor's new spending plans and the National Minimum Wage.

This is a cosy scenario and one calculated to bring a warm glow to the cheeks of the most embattled exporter. It may be premature, however, to suppose we have seen the peak of the interest rate cycle.

The last time the Bank concluded that the outlook on prices was benign, in its May inflation report, sterling promptly dived and inflation was sucked back into the system through increased import prices.

That, together with a sharp rise in earnings, tipped the balance and persuaded the MPC to lift rates in June. On the that basis, one further rise in rates before the end of the year should not be ruled out, however much noise the claque makes.