In the run up to the May UK election, it is not likely the Monetary Policy Committee (MPC) will rais...
In the run up to the May UK election, it is not likely the Monetary Policy Committee (MPC) will raise interest rates in the short term, although economists are becoming increasingly convinced there could be at least one more on the cards this year.
Tony Dolphin, director of economics and strategy at Henderson Global Investors, thinks it would have been a mistake if the MPC had raised rates in the last meeting. However, he warns there has been a growing feeling among some members of the MPC that interest rates should be raised.
Interest rates are currently standing at 4.75%.
Dolphin says: "The MPC thinks there is a risk of wage inflation which will push price inflation above the 2% target. The MPC believes there is a risk to wage inflation as the economy is operating at full capacity. If growth is allowed to be above average trend, this could push up the price of goods and services. Also, the MPC feel there are further risks following higher oil prices."
According to Dolphin, the high level of immigration has filled gaps in the tight labour market, which has been an important factor in preventing wage inflation. If the UK did not have these workers then companies would have to start bidding against each other that would lead to higher wages.
However, Dolphin thinks since 1993 higher commodity prices have not been passed through to consumers. The correlation is low due to the strength of the sterling and the high level of competition on the high street. Consumers are no longer prepared to pay if prices rise.
Furthermore, Dolphin points out the rise in interest rates have taken a toll on consumers as mortgage payments have risen. This has seen a slowdown in consumer spending and weak retail sales were reported in February. There are fewer people moving houses and buying goods for their homes.
Dolphin says: "If rates are raised again it will be unnecessary as it will slow the economy. House price inflation has already been brought down from 20% to less than 5%. There is a concern this could dampen consumer spending further and there is a possibility house prices could fall. The risk is that the psychology of falling house prices could cause people to stop spending.
"Unless there is a revival in consumer spending it is not necessary to increase interest rates."
However, not all managers think interest rates should stay as they are.
Tim Rees, director of UK equities at Insight Investments, says: "The economy has been going along quite nicely and the concern over deflation is fading. The level of interest rate is still quite low compared to the state of the economy. We believe interest rates will nudge up."
The main pressure on inflation has come from the tightness of the labour market, Rees also points out. The wage pressures have been reduced a lot by immigration through Europeans and other nationalities coming to work. This has caused a significant boost to the economy and has kept a lid on interest rate rises.
However, Rees warns immigration to the UK will depend on the strength of mainland Europe. If the European economies continues to grow and become more durable, then it is possible the migration trend could reverse and you could see more migration to Europe rather than the UK.
Rees does not feel the falls in housing price inflation has had a big impact on consumer spending. As long as rates do not rise sharply, it will not change consumers attitudes to spending significantly.
According to Rees, an interest rate rise will be likely in May after the election unless the data changes and becomes weaker. However, Rees views this as positive. Employment is strong and a slowdown in the housing market is not a bad thing and would be good if it takes a back seat. According to Rees, it is possible interest rates could go up a further 50 basis points.
Percival Stanion, chairman of BAM's Strategic Policy Group, thinks if the market firms up through the spring selling season the Bank of England may be forced to raise rates again. However, Stanion believes that, given the build up in unsold houses at estate agents and the fears of higher taxes post the election, the balance of risk still favours a weak market and no further moves by the bank.
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