The volatility and uncertainty surrounding future oil prices may cause the Monetary Policy Committee to stay its hand in raising interest rates for a second month in a row, says BDO Stoy Hayward.
However, the accountancy and investment services firm adds it will be a close-run vote because of rising inflationary pressures stoked by current high oil price levels.
The problem is that while high oil prices stoke inflation, they could also lead to slower economic growth, which would undermine the argument for any additional interest rate increases.
Still, there is no evidence rates increases so far have done anything to stem business optimism, economic output or mortgage lending, BDO says.
The latest BDO inflation index figures imply inflation according to the consumer price index method of calculating prices could hit 2.6% by the third quarter this year, way above the current official figure of 1.1%, and well over the Bank of England’s 2% target.
The BDO optimism index hit its highest levels since early 1997, while its output index indicates UK GDP growth could hit an annualised rate of 3.9% by the third quarter of 2004.
Oil prices in themselves are not necessarily the biggest challenge facing the MPC, BDO adds. What could really upset the apple cart is a rise in wage inflation, which could be triggered by higher energy prices.
Inflation on a global scale will also factor into the MPC’s discussions, and news published by the US government at the end of last week is more likely to boost rates in the UK.
US employment figures published on Friday showed some 250,000 new jobs were created in the biggest economy in May, well ahead of market expectations.
Talk in the US has since shifted to a possible interest rate increase as soon as the end of June. That would mark the first rise since the so-called federal funds rate was dropped by 25 basis points to the record low of 1% in June last year.
The MPC is due to make a statement on 10 June.IFAonline
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