MPC and ECB: rates unchanged. And British Gas cuts energy prices

No rate hikes from either the Bank of England or the European Central Bank today, in line with the market’s expectations. The MPC will have seen January’s inflation data (out next week), so it’s therefore unlikely (though not impossible) that CPI rose above December’s 3% level and into the territory where Mervyn King has to write a letter to the Chancellor. In fact today’s news that British Gas is cutting both gas (-17%) and electricity (-11%) prices as of March makes the outlook for UK inflation a little more benign. Together these items account for 3% of the Consumer Price Index, and if competitors follow suit, the impact of the price falls will be to take around 0.4% off the inflation rate. In addition, with the IDS wage data for January’s pay settlements having been revised down from the early estimate of 4% to 3.5%, the MPC will be a little more relaxed that a wage inflation spiral in not underway. The ECB however have had no such comfort, with the German metal workers union demanding 6.5%, and the Italian banking union 10%.

In the UK then we’re waiting to see some sustained weakness in housing before we call a peak in rates (mortgage approvals have fallen, but the HBOS house price index rose again today), but it might not be that far away. In the Eurozone however rates will need to go up at least a couple more times – wage growth is a threat, money supply is extremely strong, and economic growth continues to surprise to the upside. So we expect the ECB to be at, or above, 4% later this year.

 

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