THE ECONOMIC CRYSTAL BALL - OCTOBER 2009
Rates were left unchanged again at 0.50% in October, the seventh month in a row with the overwhelming expectation for 'hold' again at the November announcement. So when will rates be raised again?
The average forecast of economists polled by Reuters in October is for the MPC to hold the bank rate at 0.5% until July 2010 at the earliest. Rates were then seen rising to 0.75% by September and then finishing off 2010 at 1.0%.
However, an expansion to the quantitative easing (QE) programme at next month's Bank of England meeting is viewed as very probable. The markets have constantly pared back expectations of rate rises through the year. Inflation figures published on 13 October were lower than expected further reducing rate rises pressures.
Bank of England Governor Mervyn Kings' determination to keep pumping money into the economy reflects his concerns for the economy, with a view that a recovery-controlling rate rise a less likely prospect.
The change in swap markets reflect that rates will only have risen to around 1.75% in two years.
Prices are continuing to deflate but several factors are creating inflationary pressures. The oil price has more than doubled since earlier in the year, alongside an improvement in economic fortunes, stimulus packages and QE keeps alive the concern that rates may need to rise to quell rising prices. And a rise in VAT from 15% to 17.5% in January will also increase inflationary pressure.
The BoE has warned that CPI inflation will rises towards the end of 2009 due to various reasons, and then should fall back.
With rate cuts failing to stave off recession the BoE hopes the stimulus of aggressive QE will do the trick. A total to £175bn of printed money has been pumped into the economy and it's hoped this unprecedented measure will kick start the economy.
If inflation remains subdued, rates should remain unchanged throughout 2009 and well into 2010. But the timing on rate rises is entirely dependent on the success of QE. If the Bank applies too much then rates may have to rise rapidly to control rebounding inflation.