• The Monetary Policy Committee’s decision to not follow last month’s interest rate rise with another immediate increase does not mean that rates have peaked. I think interest rates will soon rise to 5.5%, perhaps as early as next month. And it is perfectly possible that interest rates will eventually need to rise as far as 6%.
• The economic news released over the last month certainly supports the view that interest rates need to rise further. GDP growth rose from 2.9% in Q3 of last year to 3.0% in Q4 – the fastest rate of increase in two years. What’s more, the strength of the BCC activity survey suggests that GDP growth could rise further in the coming quarters.
• Admittedly, the number of new mortgage approvals fell from 129,000 in November to 113,000 in December, suggesting that higher interest rates may be starting to have an impact on the housing market. But so far higher rates have not kept consumers away from the high street. The surveys conducted by both the CBI and the BRC suggest that retail sales were reasonably robust in January.
• What’s more, it appears that the strength of activity is still spilling over into higher inflation. CPI inflation rose from 2.7% to 3.0% in December – a whisker away from the 3.1% mark that would require the Governor of the Bank of England to write an explanatory letter to the Chancellor. And it is possible that inflation will yet rise further, triggering a letter.
• On top of that, the various business surveys have pointed to further rises in price pressures right at the start of the inflation pipeline, suggesting that firms are intent on raising their prices in order to recoup the profits lost during last year’s squeeze from energy prices.
• The inflationary threat is further compounded by fears that wage growth will rise during the current pay round. Indeed, the pay monitoring firm IDS recently stated that the median pay settlement of those deals settled in the pay round so far was 3.5%, up from the 3.0% recorded in December. And finally some members of the MPC seem particularly concerned that the rapid rates of money supply growth represent a significant upside risk to inflation in the medium-term.
• Of course, there are some downside risks too, most notably those stemming from a major US economic slowdown. But the news on the US economy has improved in recent months. And in any case, this represents a future threat while the upside risks to inflation are current.
• As such, interest rates are likely to rise at least once more. And there is a growing possibility that rates will need to stay high for some time.

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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