Annoying Everyone

4 August 2006



Bank of England Hikes UK Interest Rate to 4.75%

Inflation in the eurozone is running at 2.5%, half a percentage point above the European Central Bank’s target rate. The US rate trend is up, Japan has started raising rates for the first time in ages, and Australia hiked its rates earlier this week. Yesterday, the ECB raised the eurozone’s to 3.0% surprising no one. Also yesterday, the Bank of England raised rates to 4.75% surprising virtually everyone.

There is a case for raising rates in the UK to fight inflation. Presuming that a 2% rate of inflation is a desirable target as the BOE does (and as this journal does not; given world terrorism it ought to be higher to provide a margin for sudden slow-down), the current 2.5% is too high – but not terribly so. Nonetheless, spare capacity appears to be rare in Britain, business spending is up, and the money supply is growing.

The City, though, was caught flat-footed because a great many believed the BOE would wait for more data. The hike causes pain throughout the country. On the side of capital, the British Chambers of Commerce issued a statement saying, “The Monetary Policy Committee [of the Bank of England] has done nothing to support the UK’s economic recovery by increasing rates. In the face of heightened global uncertainties, we strongly urge the MPC to maintain a flexible stance and reject calls for further interest rate increases.” Meanwhile, the British Retail Consortium’s director general, Kevin Hawkins said, “The MPC has taken a very selective view of the economy. Consumer confidence is negative, consumer borrowing at its lowest level for twelve years, shop prices barely increasing and higher energy costs damaging consumers’ ability to spend.”

Speaking for labor, Peter Booth, Transport and General Workers’ Union National Organiser for Manufacturing, said, “"It is a disappointing decision and the wrong direction for British industry. The last month has seen mixed figures on manufacturing, but those companies who are making a tentative improvement will now find conditions more difficult. It will do nothing to improve business confidence in an already beleaguered sector. Whilst a quarter per cent increase may seem small relative to rates elsewhere, it is still significant and will have an impact on borrowing and investment.”

The move, therefore, is likely to have the hoped-for effect because it was a surprise, and because both sides of the equation are complaining. Central banks can only achieve their goals by staying one step ahead of the markets. The BOE is at least that far ahead.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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