• Today’s surprise decision by the Monetary Policy Committee to raise interest rates from 4.50% to 4.75% is unlikely to mark the start of a series of rate hikes and probably represents a one-off move that might be reversed as early as next year.
• The August Inflation Report, which is to be released next Wednesday, is likely to say that the Committee remains ready to raise interest rates again should economic growth accelerate further, inflation rise higher or the housing market continue to strengthen. However, I think that is it more likely the economic data will weaken in the coming quarters and that rates will stay at 4.75% for the rest of the year.
• Admittedly, the acceleration in GDP growth from 0.7% q/q in Q1 to 0.8% in Q2 left the economy expanding at its fastest rate in two years and marginally above its trend rate of growth. But activity in Q2 probably received a boost from the World Cup, with retail sales rising by 2.1% in Q2 compared to the 0.5% fall seen in Q1 as people bought televisions and stocked up on food and drink ahead of the matches. As such, some of the strength of high street spending in Q2 may have come at the expense of spending later in the year.
• And although CPI inflation rose from 2.2% in May to 2.5% in June, which is the highest rate in just under ten years, this may prove to be close to the peak. Admittedly, the oil price has risen above $75 per barrel in recent weeks. But this rise has been smaller than those seen last year, suggesting that the oil price will still have a downward impact on the overall inflation rate.
• What’s more, global events may soon start to have an influence on UK policy. The minutes to July’s MPC meeting suggested that the Committee is becoming more concerned that a slowdown in economic activity in the US in the second half of this year will have an adverse impact on the UK economy.

The upshot is that although there is a risk that interest rates will rise further this year, my feeling is that the data will soon weaken and that rates will remain at 4.75% for the rest of 2006. And if global demand weakens next year, as I expect, it is possible that the UK economy will need a shot in the arm and that interest rates will fall in 2007.

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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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.