Phew! The gloomy sequence of depressing economic data became a touch lighter yesterday with the news that inflation was "only" 4 per cent and the trade gap has narrowed sharply. The good news was only somewhat deflated by a report from the British Retail Consortium that sales were down nearly 2 per cent year-on-year. So a squeeze on living standards, yes, but might the further squeeze from higher interest rates be postponed a few months?
Probably not. The financial markets did indeed take the view yesterday that the rise in rates they had been expecting to come in May might come through a bit later, with money market rates and sterling both falling back. But it would be unwise for mortgage borrowers to cheer, or for savers to despair, just yet. There are four powerful reasons to expect that the first rate rise will come after the May meeting of the Bank of England's Monetary Policy committee and really only one significant reason why it might not – four weddings and a funeral, you might say.
Inflation is still way above the target range; it seems set to climb further later in the year; a modest rise in rates would not hit the economy hard if at all; and the balance of evidence is that the economy is growing again. A word about each.
The remit of the Bank of England is to maintain CPI inflation close to 2 per cent in the long-term. It has failed, performing significantly worse than either the US Federal Reserve or the European Central Bank. That failure has had serious consequences, the scale of which are just becoming evident.
It would be nice to think that inflation will come down of its own accord but it is hard to be confident. A number of reasons for the decline in inflation last month were temporary, such as lower airline fares and cheaper food in supermarkets. Sterling remains weak, particularly against the euro, and so import prices will remain high. Maybe the oil price will ease off in the coming months, maybe most of the pass-through of that VAT rise has happened, maybe, maybe .... The harsh truth remains that most economists expect worse inflation numbers through the summer, not better.
Would a rise in rates really hit the economy? The conventional headline view is it would, but borrowers seem able to make more noise than savers. Assuming deposit rates reflect increased official rates, something like half the money taken out of the economy comes straight back and it may well be that savers are waiting for higher rates before feeling confident to start spending again. In any case, access to credit at these low interest rates levels is arguably more important than the cost of it.
The fourth "wedding" is that the economy does appear to be growing all right. Support for that comes from the trade figures, which show strong exports of both goods and services. It looks as though external trade will add to GDP in the first quarter: the rise in exports will be greater than the rise in imports. A decent positive would not confirm the case for higher rates and it would be nice to have other supporting evidence of growth, but it would make the decision easier.
That leads to the potential funeral: there could be some unexpected bad news in the pipeline, either on the economy or internationally. Shocks, by definition, are unexpected and the world has had more than its fair share in recent months.
We would be mad not to be worried about the squeeze on British households, as consumer spending accounts for some two-thirds of UK demand. If there is some adverse shock between now and May, then the rise in rates may well be postponed, perhaps by three months. But then the subsequent rises might have to be greater. So while the chance of a rise in May is still better than evens, it is not quite as clear cut as it was a few days ago.
A long, dark, Greek shadow over Spain
Will Spain follow Portugal and need a bailout? Such is the harsh maths of the financial markets that the moment one country capitulates the next weakest comes under scrutiny: if Portugal cannot meet its debts how do the numbers for its neighbour stack up?
It is an unpleasant process but an apolitical one. Politicians see the challenge of the markets as an attack on themselves and huff and puff away about its iniquity – as the Spanish authorities have been doing. But actually the markets are really only doing, in to be sure a pretty incoherent way, their fiduciary duty. Will people get their money back? If you think not, you should not lend it.
As it happens I was in Madrid this week and the mood there was, paradoxically, to be more worried about Greece than about Spain itself. The cost of insuring Spanish debt has fallen a little in recent days, suggesting that the balance of opinion has shifted a little in the country's favour. But the burden of Greece was casting a long shadow. The problem is that businesses selling stuff to Greek buyers, including the government, are not getting paid on time. Well, I'm sure many are, but others are getting paid in bonds or promissory notes rather than cash.
So at a company level the difficult question is at what stage do you stop shipping goods? You have a trusted business relationship and, presumably, eventually you will get the money. But are you right to take the risk? And if exports to Greece falter that has a knock-on impact on you, the Spanish-based, company. It could get worse, for you have to ask whether the same contagion might affect Portugal. If it does, Spain is in trouble too.
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