Will we see a 0.5% interest rate hike today?
A quarter-point interest rate rise to 5.5% is widely expected today. But a bigger hike could be just the medicine that the British economy needs as the inflation threat becomes more severe.
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Another month, another interest rate decision.
What'll it be today? The Americans didn't spring any surprises last night, keeping the US key interest rate at 5.25%, where it's been since last June.
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It seems unlikely that our own Bank of England will be making any headlines either. A rise to 5.5% is widely expected. While a half-point hike might be just the medicine the British economy needs right now, it's unlikely to garner enough support among the Monetary Policy Committee's members.
That's something they may come to regret later
The Bank of England is almost certain to raise the UK base interest rate to 5.5% today. But calls for a half-point hike are likely to be ignored.
Even the shadow MPC, which meets under the auspices of Lombard Street Research, didn't manage to push through a half point rise. That's even though, as a group, it is markedly more concerned about things like rampant money supply growth than the real MPC.
We may see a couple of half-point votes. But judging on past form, US commuter David Blanchard is likely to vote for a freeze, if not a cut. And deputy governor Rachel Lomax is far more cautious about raising rates than the governor Mervyn King.
And even Mr King seemed to think that inflation is set to come down, taking a fairly sanguine tone when he wrote to the Chancellor last month, explaining why consumer price inflation had gone more than 1% above the 2% target.
But maybe we shouldn't dismiss the chance of a half-point hike altogether. The Bank seems to be worried that it's been making recent decisions based on faulty data. It has openly criticised the Treasury's plans to move National Statistics to Wales, from London. With key staff unwilling to up sticks, the Bank reckons the move poses a "serious risk to the maintenance of the quality of macroeconomic data." The Bank is also worried that its inflation target measure - the consumer price index - is drawn from too narrow a sample set.
The wider-ranging retail price index is now at 4.8%, nearly 2 full percentage points above the CPI rate of 3.1%. This does suggest that perhaps the MPC reckons that it would have been setting rates higher if CPI just included more of the things that matter, like housing costs for example.
Whatever the case, the Bank should be worrying about inflation. The British Retail Consortium has just released data showing that shop price inflation rose to an annual rate of 0.8% in April, from 0.7% in March. As usual, the BRC tries to dismiss the figures by arguing that because they are far below the official inflation rate, it shows that shops aren't contributing much to inflation.
This of course is bare-faced self-interest. The point with the inflation statistics is that the fact that prices aren't falling anymore matters as much as the rate at which they're rising. We've been used to shop prices coming down, which has offset the rising prices of most services, like haircuts and healthcare not to mention, of course, rising bills. But now that shop prices aren't falling anymore, well, there's nothing left to cover up the soaring cost of all those other things.
And, having seen massive increases in fuel and petrol bills in recent years, the latest essential to start squeezing consumer pay packets is food. Food prices are rising across the globe and across all types of food. The price of a humble onion, for example, is at a 15-year high.
There are plenty of reasons for this happening - climate change (whatever the cause), demand from Asia and biofuel folly are probably the most important ones - but the key point is that, as Bedlam Asset Management recently pointed out, this is a structural change. No one in the West, at least, will starve - but investors should be prepared for a future of higher prices and food shortages.
You can read more about food price inflation, what's causing it, and how to profit from it, in this week's issue of MoneyWeek, out tomorrow.
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Turning to the stock markets
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In London, the FTSE 100 closed flat yesterday at 6,549, despite a strong performance by miners sparked by takeover talk in the sector. Rumoured bid target Rio Tinto led the gains with a share price rise of 10%, whilst potential bidder BHP Billiton's stock was up by more than 5%. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 ended the day 19 points lower, at 6,051, whilst the Frankfurt DAX-30 was given a boost by Commerzbank and closed 33 points higher at 7,475.
Across the Atlantic, the Dow Jones hit a new record closing high of 13,362 - a 53-point gain - as US stocks rebounded. The tech-heavy Nasdaq added 4 points to end the day at 2,576. And the broader S&P 500 was also 4 points higher, at 1,512.
In Asia, the Nikkei closed 11 points lower, at 17,736, today.
Crude oil futures last traded at $61.78 in New York, whilst Brent spot was at $64.23 in London.
Spot gold was little changed at $679.10 this morning, compared to $679.50 in New York late last night, and silver had fallen to $13.30 an ounce.
In the foreign exchange market, the pound was trading at 1.991 against the dollar and 1.4706 against the euro this morning. And the dollar was at 0.783 against the euro and 120.28 against the Japanese yen.
And in London this morning, commercial property stock Hammerson shot up by as much as 12% in early trading following reports of interest from private equity group Kohlberg Kravis Roberts and US REIT Vornado Realty Trust. Hammerson executives had so far made no comment on the story which appeared in The Business.
And our two recommended articles for today...
Why sky-high gold is just two steps away
- The gold market is under serious pressure, says James Turk of Goldmoney. The fundamentals mean that the price has to rise, but central bank intervention is preventing it from doing so. To find out what two developments could release the pressure and push the metal to multi-decade highs, read: Why sky-high gold is just two steps away
Forget Kate Moss shorts - what women should really spend their money on
- Why are the queues for Anya Hindmarch bags and Kate Moss shorts so depressing? Because whilst some women will go to great lengths to secure the latest 'must-have' item, half the female population still haven't got round to sorting out a pension. For more from Merryn Somerset Webb on why it's better to forgo tat in favour of financial stability, click here: What women should really spend their money on
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