View from City Road: The Bank's rate cut resistance may be low

The high hopes that the Bank of England might prove to be a wise seer have been confounded after all. Despite the undoubted depth of its analysis, the Old Lady has been a lagging indicator. With each of its inflation reports, it has gradually become more optimistic.

Last October, it predicted that the Government would have difficulty keeping inflation within its 1-4 per cent range (excluding mortgage interest payments). In December, it was happy enough with the outlook to revise its forecast down from 4 per cent to 3.5 per cent, where it stuck in the spring. Now it has lopped another half point off its central view.

True, the Bank points out that the least distorted measure of inflation is not as good as the rest. Thanks to the switch from a high poll tax to a lower council tax and more VAT, the Government's underlying inflation measure has dropped by some 0.7 per centage points. Retail inflation excluding mortgage rates and local authority and indirect taxes is 3.2 per cent rather than 2.8 per cent for the Government's measure.

Even so, the Bank's preferred rate is still dropping. Annualising the last three months on the previous three, this inflation measure was 2.8 per cent against 4 per cent in March and 3.7 per cent in December.

Nor is earnings growth likely to revive, since short-term unemployment is still high and inflation low. Productivity is soaring, cutting unit labour costs. Profit margins are improving, but start from a higher base than in previous recessions, limiting the likely prices boost during the recovery. Even the higher import prices due to the 10 per cent fall in sterling since last September seem to have been largely absorbed.

In short, it is hard to see the new Governor putting up more than token resistance to another interest rate cut. With a political Chancellor at the Treasury, the clever money should be on at least half a point before or during the Conservative Party conference at the beginning of October, with another tranche at the time of the November budget.