Why UK interest rates will rise by June
This week's round of economic statistics has shown fast-rising retail sales, sky-rocketing money supply growth and no sign of a cooling housing market. Which all adds up to an interest rate rise.
Update: read What will the latest rate hike mean for the UK economy? for more insight on UK interest rates.
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Britain is booming, it seems.
The latest Confederation of British Industry retail survey suggets that high street sales in March rose at their fastest pace in more than two years, and were twice as strong as analysts had predicted.
Meanwhile, despite vague hints from the Nationwide earlier in the week that house price growth had slowed, the February figures from the Bank of England on mortgage approvals were also above expectations. The number of approvals remained at 119,000, against forecasts for a fall.
And of course, the monetary supply continued to grow at a rate of knots, with M4 annual growth up 12.7% in February, little changed on January's 12.8%.
So what does this all mean? One almighty headache for Mervyn King, that's what...
New of strong UK retail sales and solid mortgage lending came despite reports earlier this week that consumers' disposable income was squeezed harder last year than for more than 20 years. On top of this, oil prices are heading back to uncomfortably high levels, defying continued forecasts for a decline.
All of this adds up to another interest rate rise from the Bank of England's Monetary Policy Committee either next week, or in May. Although some of the MPC members remain relaxed about inflation, and in fact, at least one thinks rates are too high, the majority, including governor Mervyn King remain concerned.
As relative newcomer Andrew Sentance pointed out: 'There is a risk of repeating the mistakes of 1987, when a loosening of monetary policy in response to falling stock markets was overdone and provided a further boost to the late-1980s' demand-led boom.'
You could of course argue that such a mistake has already been made at a global level, with miniscule interest rates in the US and Japan (and to a lesser extent the UK and Europe) at the start of the millennium pumping up asset bubbles across the world.
In fact, the former Bank of England governor Eddie George recently admitted that this was precisely what had happened. He argued that he was forced by recessionary threats to cut rates 'to levels which couldn't possibly be sustained into the medium and long term' - a problem which his successor would now have to sort out.
You've got to admire his honesty the closest that Alan Greenspan will come to acknowledging the mess he's left for Ben Bernanke is to unhelpfully point out that the US may well be in recession by the end of the year.
But the trouble for the rest of us is that George's eagerness to dodge a recession on his watch means that the pain has just been put off to a point where it will hurt more. Those low rates have allowed consumers to overstretch themselves ever further, getting to the point where there's no slack left in the system to cushion them against the hard times.
So unless we've somehow abolished downturns which would be a first in the history of humankind the next one could be very tough indeed for all concerned.
The economist Hyman Minsky, who died in 1996, had a very effective model for charting the course of bubbles. His basic idea was that stability is unstable' the longer the good times last, the more risks people take, which in itself leads to the next downturn. The turning point which UBS economist George Magnus terms a Minsky moment' - is when lenders start to get cold feet and credit conditions start to tighten.
And with the US sub-prime debacle squeezing creditors in America, while interest rates around the world head higher, it looks like that's exactly where we are now.
Turning to the stock markets...
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The FTSE 100 closed 57 points higher yesterday, at 6,324, having bounced back from an earlier low of 6,267. The day's stand-out performer was brewer Scottish & Newcastle which jumped by over 12% on rumours of a bid by Heineken. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 climbed 78 points to a close of 5,631. In Frankfurt, possible private equity target Deutsche Post led the DAX-30 80 points higher to a close of 6,897.
Across the Atlantic, stocks closed higher as an upwardly-revised economic growth forecast offset the rising price of oil. The Dow Jones climbed 48 points to end the day at 12,348. The tech-heavy Nasdaq closed a fraction of a point higher, at 2,417, and the broader S&P 500 ended the day at 1,422, a 5-point gain.
In Asia, the Nikkei 225 ended the session marginally higher today, gaining 23 points to close at 17,287. The Hang Seng, meanwhile, fell 20 points to 19,801.
The price of crude oil had risen again today - last trading at $66.37 a barrel - as Iran continued to hold 15 British military personnel. In London, Brent spot was 52c higher, at $68.48.
Spot gold was slightly higher - at $662.40 - this morning, having fallen $5 yesterday. Silver was last quoted at $13.29.
And in London this morning, chemist Alliance Boots indicated that it may enter into discussions with Kohlberg Kravis Roberts and Italian billionaire Stefano Pessina after the latter raised their joint bid to £10.1bn. Alliance Boots shares had risen by as much as 1.9% in London this morning,
And our two recommended articles for today...
Could private equity re-energise the US power sector?
- The US electric power sector will require $800bn of investment by 2020 to keep the lights on. And though it may have its critics, private equity could provide the management and investment necessary to solve America's energy problems. To find out where private equity's next target could be found, read: Could private equity re-energise the power sector?
Prepare for Chinese economic change
- Unstable, unbalanced, uncoordinated and unsustainable: the words used by China's own premier about the state of his economy. But this is all about to change - so it's time for investors to update their thinking too. For more on the major economic trends and new government policies which will affect any investor with an interest in China, see: Prepare for Chinese economic change
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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