Contact: Jo Ouvry
Deloitte
Public Relations
+44 (0) 20 7303 0587

• The Monetary Policy Committee left interest rates at 4.75% today largely as it prefers to move rates in a month coinciding with the publication of the Inflation Report, which provides an opportunity to explain the decision. I think that the widely expected rate hike to 5% will happen in the Inflation Report month of November.
• The case for a November rate hike remains fairly clear. The previously announced gas price, electricity price and university tuition fees hikes are likely to push CPI inflation above Augusts' reading of 2.5% in the coming months. Indeed, there is a clear risk that inflation will rise above the upper target limit of 3%, which would require the Governor of the Bank of England to write a letter to the Chancellor explaining why. If Mervyn King had to do this, it is likely that he would prefer to have raised rates twice so that the MPC could not be accused of dragging its feet. What’s more, a November rate rise would be a timely warning to wage setters ahead of the January pay-round. Moreover, it is possible that similar arguments could be deployed to justify increases beyond 5%.
• But more recent developments support the view that 5% is likely to mark the peak of this interest rate cycle. The Q2 National Accounts revealed that economic growth has not been as strong as previously thought. The annual growth rate of nominal GDP in Q2 was revised down from 6.0% to 4.8%. And the quarterly rise in real GDP in Q2 was revised down from 0.8% to 0.7% – bringing the economy back in line with its trend rate.
• What’s more, the pressure on households’ finances appears to have intensified. Real income fell by 0.2% in Q2 relative to Q1. This meant that the rise in household spending in Q2 was entirely funded by households running down their savings. Furthermore, credit card borrowing fell by £0.3bn in August, the largest fall since this series first began in 1987.
• More importantly, the oil price has fallen from its recent peak of $78 per barrel to $60. Even if the oil price were to fall no further, this would have quite a large downward impact on CPI inflation next year. And the recent falls in the wholesale gas price could mean that utility suppliers will be in a position to announce gas and electricity price cuts sometime in spring 2007.
• The upshot is that the outlook for inflation over the next year or so has weakened over the last month and there is every reason to expect that CPI inflation will be comfortably back below the 2% target rate in the second half of next year. And a US-led global slowdown is likely to mean that before too long the MPC will have to cut interest rates in order to support domestic activity and prevent a significant undershoot of the 2% inflation target.

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.

About Deloitte

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. 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. For further information, visit our website at www.deloitte.co.uk

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.