• The Monetary Policy Committee decided not to play Scrooge today by leaving interest rates on hold at 5%. But the Christmas cheer will not last long as interest rates are likely to rise to 5.25% in February of next year.
• Admittedly, the case for higher interest rates has diminished somewhat over the last month. The latest evidence suggests that retail sales have been soft at the start of the crucial Christmas trading period. The CBI’s reported sales balance fell from -4 in October to -9 in November and the BRC’s annual growth rate of like-for-like sales dropped from 2.6% to 0.5%.
• Of course, there is still plenty of time for retail sales activity to pick-up before Christmas. Indeed, consumers may be just waiting until retailers start slashing prices. However, the fall in the GfK measure of consumer confidence from -5 in October to -7 in November suggests that higher interest rates are starting to bite. As such, consumers may be less generous this Christmas.
• What’s more, the prospects for the external sector have deteriorated. After excluding the effects of VAT fraud, the volume of the UK’s goods exports fell by 3% in Q3. And the more forward-looking survey measures of export orders have struck a softer tone of late. This could be the first sign that a US-led global slowdown is starting to have an adverse impact on the UK. And the recent rise in the pound to a 14 year high against the dollar will amplify any such effects in the future.
• But at 2.4% in October, CPI inflation is still above the 2% target and has been for six months. Admittedly, thanks to a smaller than expected upward influence from the recent rise in university tuition fees and the downward influence from falling petrol prices, inflation is unlikely to rise to 3% as looked possible a few months ago. On top of that, Rachel Lomax joined Danny Blanchflower in opposing November’s interest rate hike.
• That said, a majority of the MPC is likely to be concerned enough about the inflationary threat from the rapid rates of money supply growth and the impending January pay round – especially with RPI inflation currently at an eight year high of 3.7% – to vote to raise interest rates to 5.25% in February.
• After February, though, the inflation outlook is likely to look a lot more benign and the Committee’s attention will switch to the impact on the UK economy from the US economic slowdown. As such, I expect interest rates to fall back to 5% by the end of next year and someway further in 2008.

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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