Investors could be jolted by BOE interest rate rise

Brett Alegre-Wood
January 6, 2011

Investors aren't expecting the Bank of England to start interest rates rise until the final quarter of this year. They shouldn't be so complacent. Members of the Bank's Monetary Policy Committee are starting to worry they're losing credibility about their willingness to maintain price stability, particularly as the public's inflation expectations start to ratchet higher.”

Little wonder. For the past five years, U.K. consumer price inflation has consistently overshot the Bank's official 2% year on year target. What's more, it has been at or above 3% since the start of 2010 and is expected to hit 4% over the coming months. Nor has the MPC done itself any favors by systematically underestimating inflation trends. As recently as last February, it was forecasting the CPI to dip to 1% by the end of 2010. Inflation came in at 3.3% in November, the most recent month for which there is data.

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Brett responds:

The MPC is caught between a rock and a hard place with this one. On the one hand they have to sit and wait and see what the effect of the Austerity measures and VAT increase have on the economy but on the other hand they really have to address inflation and interest rate rise. If it was me I would be holding rates where they are until at least May (remember we have the ridiculous timing of the royal wedding around Easter which will kill business for two whole weeks.) Then providing they are still on an even keel I would raise them slowly to 2% and would finish the year here.

Inflation needs to be kept in check otherwise we'll need a large interest rate rise, but as it stands I agree with the MPC decisions to hold. They don't really have any other choice.

Live with passion,
Brett Alegre-Wood

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