Why interest rates should rise today

The recent market turmoil has put paid to any idea that the Bank of England will hike the base rate to 6% this month. But whilst the MPC may not want to make itself unpopular with the City, there's really no good reason for holding off a rise, says John Stepek.

Latest: UK interest rates held at 5.75%

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No one's expecting interest rates to rise today.

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The recent market turmoil has put paid to any idea that the Bank of England will hike the base rate to 6% this month.

We suspect that's true. The "let's wait and see" faction on the Monetary Policy Committee will no doubt be boosted by those members who are worried about their popularity in the City.

But that doesn't mean it's the right decision

If you can ignore the yo-yoing stock markets for a moment, there's actually no good reason to hold off on hiking the base rate to 6%. In fact, the sooner rates are raised, the better.

Food prices are shooting up, and our recent weather problems will make the issue even worse. The oil price hit a new record high in New York yesterday, breaching the $78.40 seen in July last year. All of this is driving up manufacturers' costs - and they are happily passing them on to the consumer.

Factory gate prices rose at their fastest pace in 15 years in July, pushing output prices to their highest level since records began in 1992. As James Knightley of ING told The Telegraph: "This is yet another report showing that economic activity is yet to be significantly dented by higher interest rates and strong sterling. With input and output prices also rising, the report highlights the strength of corporate pricing power, which is a major concern for the Bank of England."

Unsurprisingly, shop prices are also still rising year-on-year, according to the British Retail Consortium. Second-quarter GDP growth for the UK was stronger than expected. And despite all the vague mutterings about a property slowdown, there's precious little evidence of one kicking in as yet.

There are worrying signs certainly. For example, though mortgage approvals were higher than expected in June, if you read the figures in more detail, you'll find that a large proportion of those were non-standard mortgages. In other words, we're still merrily stacking the tinder for our very own subprime bonfire over here. But that's more reason than ever to raise rates - lenders and borrowers need to be made aware that they can't rely on the MPC to keep the housing market afloat.

Basically, there's every reason to hike interest rates today. And it could still happen. The Bank's quarterly inflation report, which we'll get to see next week, is available to the MPC when it makes today's decision. If that report suggests - as Douglas McWilliams of the Centre for Economics and Business Research said earlier this week - that inflation might breach the 3% limit again before the end of the year, then the MPC may feel obliged to take action.

But even if the Bank does hold off, we imagine the debate will be more heated than usual. And we can certainly still expect rates to rise later in the year.

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Turning to the wider markets

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Despite earlier signs of a recovery, London's blue-chip stocks ended yesterday with triple-digit losses as US volatility rattled investors. The FTSE 100 tumbled 109 points to close at 6,250, though off an intra-day low of 6,187. The broader FTSE indices were also lower. Pharmaceuticals stock Shire was rare gainer, topping the FTSE risers, whilst Cadbury Schweppes led the fallers with a share price slump of over 8% prompted by a fall in interim profits. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 was down 96 points to 5,654 and the Frankfurt DAX-30 closed 110 points lower, at 7,473.

Across the Atlantic, stocks ended a choppy day with broad gains as buyers returned en masse in the final hour of trading. The late surge saw the Dow Jones add 150 points to end yesterday at 13,362. The S&P 500 was 10 points higher, at 1,465. And the tech-heavy Nasdaq was 7 points higher, at 2,553.

In Asia, the Tokyo Nikkei 225 added 113 points to close at 16,984 today thanks to buoyant property stocks, but the Hang Seng had fallen by as much as 294 points to 22,436.

Crude oil futures were last trading at $76.49 and Brent spot was at $75.94 in London.

Spot gold had edged up to $665.10 this morning, whilst silver had risen to $12.96.

Turning to the foreign exchange markets, the pound was at 2.0300 against the dollar and 1.4858 against the euro. And the dollar was at 0.7317 against the euro and 118.73 against the Japanese yen.

And in London this morning, consumer goods company Unilever announced a expectation-beating 16% rise in second-quarter profit. The company attributed its fastest sales growth in two years to demand for its Magnum ice-cream and Clear anti-dandruff shampoo brands and strength in Asia and the Americas. The results saw Unilever shares notch up their biggest gain in seven years, rising as much as 6.1% in early trading.

And our two recommended articles for today...

Why the gold market is an investor's best friend

- Considering gold is a traditional 'safe haven' against falling markets, you may be wondering why it's been so volatile of late. For the real reason investors are selling - and why, in the long-term, gold's worth holding on to - read: Why the gold market is an investor's best friend

Could we be heading for an oil 'super-spike'?

- The record high hit by crude futures this week could be the first in a series of tests of new highs. But will oil reach the $105 (or above) 'super-spike' level predicted by Goldman Sachs analyst Arjun Murti? Garry White explores the experts' predictions here: Could the oil price be heading for a 'super-spike'?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John 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. John joined MoneyWeek in 2005.

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.