• Today’s decision by the Monetary Policy Committee to leave interest rates at 4.5% for the ninth consecutive month will prompt more people to think that the next move in interest rates will be upwards. But I still think that the chances of further rate cuts have not completely evaporated.
• Admittedly, the latest data suggests that economic growth may finally be rebalancing away from the consumer sector and towards industry, with industrial production rising at a faster rate than services output in Q1 for the first time since Q3 1999. What’s more, the recent strength of the CIPS and CBI manufacturing surveys suggests that this may continue.
• However, the fact that GDP growth was still below the economy’s trend rate in Q1, despite the robust performance of industry, leaves doubts over whether industry can fully compensate for continued weakness in the consumer sector.
• And it looks as though the external sector is not going to provide much of a boost. Not only did February’s trade in goods deficit come in at a record £6.5bn, but January’s deficit was revised up from £5.7bn to £6.5bn. This suggests that net trade is likely to have been a drag on Q1 GDP growth after making a rare positive contribution in Q4 of last year. As such, I expect overall GDP growth to come in at around 2.2% this year – below trend for the second year in a row.
• On the inflation front, the rise in the oil price towards $75 per barrel has prompted a renewed bout of inflation worries. Indeed, the Bank of England’s Inflation Attitudes survey showed that the public’s expectations for inflation picked up sharply from 2.2% in November to 2.7% in February. But this may just be a response to the recent gas and electricity price hike announcements that were heavily publicised in the national press. Indeed, it is likely that this indicator simply reflects past movements in inflation rather than the public’s true expectations.
• In any case, CPI inflation itself fell in March, to 1.8% from 2.0% in February. Although the latest climb in petrol prices up towards £1 per litre is likely to prevent inflation from falling further in the next few months, subdued demand in the consumer sector will continue to contain underlying price pressures on the high street.
• The upshot is that talk of higher interest rates may be a bit premature. Admittedly, if the strength of the housing market prompts a pick-up in general consumer activity, interest rate rises may come on to the agenda before the year is out. But for the moment, I think that the prospect of a significant undershoot of the 2% CPI inflation target later this year suggests that the next move in rates is still more likely to be down than up.

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. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and 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 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.

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.