Will the Bank of England raise interest rates?

As the Bank of England begins its interest-rate setting meeting today, many expect they will hold off hiking rates again until next month. But we say – why put off until tomorrow what you can do today?

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The Bank of England begins its latest interest-rate setting meeting today, before delivering its decision tomorrow at noon.

Most pundits reckon the Bank will hold off until next month to hike interest rates by another quarter point. Anything else would shock the City, they say and of course, November is when the next quarterly inflation report comes out, and the Bank has tended to coincide rate changes with these reports in the past.

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But we say why put off until tomorrow what you can do today? And we're not the only ones...

The shadow Monetary Policy Committee, which is run under the auspices of the Institute of Economic Affairs, voted for a rate hike by a hefty margin this month. Six members backed a rise against just three backing a freeze.

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Why should we care about a group of grown men and women dressing up as Bank of England Governor Mervyn King and chums? Well, because they've proved rather good at calling interest rate changes they also voted for a hike in August, when almost no one else (except us) forecast that the base rate would rise to 4.75%.

So why should the Bank be raising rates? After all, oil prices are coming down aren't they? Well, they have come off somewhat in recent months, and there's no saying they won't stay at current levels - at least until the next big geopolitical scare, or until the US winter heating season begins - but oil's not the only thing the Bank needs to worry about.

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It looks like rising costs for manufacturers and retailers are finally being pushed all the way through to the consumer. The British Retail Consortium has reported rising shop prices on an annual basis for two months in a row now (July and August), and Tesco's latest sparkling results contain a little nugget of information that will worry the Bank.

The company posted operating profits of £1.1bn for the first six months of the year. Like-for-like sales (that is, sales excluding new stores) rose 6.5%. And despite rising energy costs, operating margins remained flat, at 5.6%.

How did the supermarket behemoth achieve this, you might wonder? Part of the reason is its expanding product mix - Tesco is growing at stellar rates across various sectors, from clothing to magazines. But the other reason is that price deflation has quietly ended. Chief executive Terry Leahy reckoned that prices rose by about half a percent in the second quarter.

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That doesn't seem like much, but shop price deflation has been one of the few things offsetting the rising prices of just about everything else. If shop prices keep creeping up, consumers will rapidly notice, and that's when inflation expectations start to become entrenched. The Bank may well feel that a surprise hike tomorrow will keep everyone on their toes - as well as leaving it the option to hike again in November, should it feel the need.

And just an addendum to yesterday's piece on internet gambling stocks as we pointed out, one of the problems with buying into the sector just now is that no one knows just how much the retreat from the US is going to cost the companies involved. And now it looks as though there may be a casualty already.

World Gaming has said it could be in "technical default of its loan conditions due to a material adverse change in the circumstances of the business." The US represents a full 95% of its business its shares fell 76% on Monday, after news of the new law banning internet gambling hit home, while the warning saw it collapse another 40% yesterday.

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The full details of why there could be a breach have not yet been revealed - but it does leave us wondering what other nasty little surprises could be lurking in the sector.

Much better to bag a few Tesco shares - as John Foley points out on Breakingviews, it's still trading at a discount to its European peers, Carrefour, Delhaize and Metro, despite the fact that it's growing faster than all three, and has "actually stepped up expansion plans." And of course, Tesco shareholders don't have to worry about US regulators shutting the company down - at least, not unless it threatens to dominate the American grocery market as much as it towers over our own.

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Turning to the wider markets

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Despite a late rally prompted by a strong morning on Wall Street, the FTSE 100 finished in the red on Tuesday. The index was down 20 points at 5,937, with online gambling company PartyGaming the biggest faller of the day once again. For a full market report, see: London market close

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Elsewhere in Europe, the Paris CAC-40 finished 23 points lower at 5,219. In Germany, the DAX-30 was down 7 points, at 5,992.

Across the Atlantic, stocks were higher, with the Dow Jones closing at a record high of 11,727, a 56-point gain. The S&P 500 was 2 points higher, at 1,334, and the tech-heavy Nasdaq was 6 points higher, closing at 2,243.

In Asia, the Nikkei closed 159 points lower, at 16,082.

The price of crude oil continued its tumble this morning, last trading at $58.42. Brent spot was also lower, at $57.28 in London.

The price of gold rebounded overnight, as bargain-hunters responded to a 3% drop in New York late yesterday. Spot gold was quoted at $576.35 early this morning.

And in London today, oil heavyweight BP released a statement announcing third quarter oil and gas output of 3.8m barrels, a 0.6% drop and its fifth consecutive fall in output. The oil company announced that losses from its Prudhoe Bay oilfield in Alaska had outweighed the benefits of a benign hurricane season and new start-ups. Shares had fallen by as much as 10p this morning, dipping to a 16-month low.

And our two recommended articles for today...

US growth is slowing - is Asia ready? - The US economy is slowing, led by weakness in the housing market. What is the extent of Asia's exposure to the US slowdown? And which markets are in the strongest position? For Jeremy Batstone of Charles Stanley's analysis of the markets, from India and China to Indonesia and Taiwan, read: US growth is slowing - is Asia ready?

How you can hedge against inflation- Current official inflation even at around just 2.5% will halve your purchasing power in less than 30 years, says Andrew Vaughan in the Daily Reckoning. However, clever investors can hedge against rising prices. To find out how to offset the rising costs of motoring, house prices, or whatever is hitting your bank account the hardest, see: How you can hedge against inflation



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