Bank of England Keeps 5.0% Bank Rate

August 7, 2008

British interest rate policy remained frozen as expected, pulled between inflation that is at a decade-long high and activity that is sinking fast and broadly across all sectors.  From a 5.75% peak, the Bank rate had been cut by 25 bps each in 12/07, 02/08 and 04/08.  However, CPI inflation has jumped to 3.8% from 2.1% in 4Q07 and core retail price inflation has risen to 4.8% from 3.1% in 4Q07.  The PMI indices in July were below 50 (44.3 for manufacturing and 47.4 for services compared to scores in August 2007 of 56.1 and 57.8).  Thus, their sum has dropped from 113.9 to 91.7 in the space of 11 months.  The housing market is imploding.  Mortgage approvals have collapsed, and on-year movement in the Halifax house price index has swung to -8.8% from +11.2%.  Factory output and industrial production in the U.K. each fell 0.8% (not annualized) in the second quarter.  Consumer sentiment is in free fall.

No statement was released today by the central bank, as per custom.  New quarterly price and growth forecasts will be unveiled on August 13th, followed by minutes of today’s meeting due on the 20th of this month. July’s meeting resulted in a 7-1-1 vote, with Besley dissenting in favor of a 25-bp rate hike and Blanchflower dissenting in favor of a 25-bp rate cut.  The Committee favors synchronizing its policy changes with months when new forecasts are released (that is, February, May, August or November). Bank of England policy appears unlikely to change in the near term.  The central bank’s hands are tied even thought a recession appears increasingly unavoidable.  Fiscal policy has limited flexibility, too, and the ruling Labour Party trails the Conservatives in polls by 23 percentage points.



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