Bank of England Rate Kept Steady

July 10, 2008

The Monetary Policy Committee will release minutes of this week’s meeting on July 23rd to explain its as-expected decision to leave its benchmark rate at 5.0%.  There had earlier been 25-bp rate cuts in 12/07/ 02/08 and 04/08, and the U.K. economy is headed for a possible recession, led by a collapsing housing market.  The Halifax house price index was today reported to have dropped by a record 6.1% in the year to June, compared to a rise of 10.7% in the year to June 2007, while the Nationwide house price index fell 6.3% y/y in June versus a rise of 11.1% in the prior statement year to June 2007.  In the three months to May, industrial production fell 0.5% versus both the level in the three months to February and against the level of a year earlier.  Alas, U.K. inflation is running well above its 2.0% target.  A gain of 3.3% y/y is the highest since the Bank of England was given independent authority over setting interest rates in 1997, and central bank officials warn that inflation could crest above 4%.  Actually, a peak above 5% looks conceivable, depending on future commodity price developments.  The MPC interest rate vote in June was 8-1, with perennial dove Blanchflower urging an immediate rate cut but finding no takers for that idea from others on the policy-making committee.



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