Today’s decision by the Monetary Policy Committee to leave interest rates on hold at 4.5% does not rule out further interest rate reductions. I think there is a good chance that rates will be cut by 0.25% in February. And even if the Committee holds back for longer, I still see interest rates falling to 4% by the end of the year.

February is likely to be the earliest month when the Committee could feel confident that the threat of higher wages growth in response to last year’s rise in inflation has passed. The annual growth rate of average earnings fell from 4.1% in September to 3.6% in October. And the early evidence on the January pay round has been subdued, with the British Footwear Association announcing a modest 2.5% pay rise for its members.

At the same time, the economic data have remained broadly weak. The Q3 National Accounts revealed no upward revisions to GDP growth.

Admittedly, the news from the high street has improved in recent weeks. The like-for-like annual growth rate of the BRC’s retail sales monitor rose from 0.8% in November to 2.6% in December, leaving it at an 18 month high. And the early reports from some high street retailers, such as Next and Marks & Spencer, suggest that the Christmas and January sales period was reasonably robust.

However, I am doubtful that a strong spending recovery will be sustained as other indicators of consumer activity have remained weak. The household savings ratio rose for the second consecutive quarter in Q3 and the GfK’s composite measure of consumer confidence fell to a 33 month low in December.

And although consumers still seem willing to increase their secured borrowing, unsecured credit rose by just £0.9bn in November – a five year low. This suggests that consumers are thinking twice about taking on the more expensive forms of debt, such as credit card borrowing.

With inflation now looking as though it is firmly past is peak – in November CPI inflation fell for the second month in a row, from 2.3% to 2.1%, and is likely to fall back below the 2% target rate in coming months – the MPC can now concentrate on supporting economic activity by reducing interest rates further.

Indeed, if the Committee does not cut interest rates this year, then it will be presiding over a significant undershoot of the 2% inflation target without taking offsetting action.

Roger Bootle
Economic Adviser to Deloitte

Ends

Notes to editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte.  If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or via email on business@capitaleconomics.com.

This press release contains general information only and is not intended to be comprehensive nor to provide professional advice.  It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business.  Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services through more than 9,000 people in 21 locations. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and its people excel. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other’s acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.