• The decision by the Monetary Policy Committee to leave interest rates on hold at 4.5% in November, which just a month ago looked like the most likely time for the next rate cut, does not mean that interest rates have already hit a trough. I think that the next cut will come soon after the New Year, with interest rates ending 2006 at just 3.5%.
• The future path of interest rates depends crucially on whether the rise in inflation over the last year feeds through into “second round” effects, such as higher wages growth and inflation expectations. The Committee is quite right to be concerned about this threat. But at the moment there is little evidence that it is being realised.
• Indeed, headline average earnings growth has fallen in recent months, from 4.6% in April to 4.2% in August. And the latest news suggests that both the public’s and the market’s inflation expectations remain broadly consistent with the 2% inflation target.
• In any case, with inflation looking as though it is close to a peak, the MPC may not need to worry about the threat from second round effects for much longer. Core inflation, which excludes the effects of energy prices, has already fallen in each of the last two months. And with the oil price now falling, headline CPI inflation may soon ease back from the 2.5% recorded in September.
• Admittedly, the housing market appears to have strengthened in recent months. The annual growth rate of the Nationwide house price index rose for the first time in 14 months in October, from 1.8% to 3.2%. And the rise in the number of mortgage approvals from a low of 76,000 just under a year ago to 107,000 in September is consistent with this tentative recovery continuing.
• But despite this, the economic data have remained fundamentally weak. The quarterly rate of GDP growth slowed from 0.5% in Q2 to 0.4% in Q3. And although retail sales rose by a robust monthly 0.7% in September, the annual growth rate still fell to a ten year low of 0.7%.
• More recent data show that consumer confidence has started to deteriorate quite rapidly, with the GfK’s composite index falling from -5 in September to -8 in October. This left confidence at its lowest level since 1998, bar the dip in early 2003 during the Iraq war.
• Accordingly, with inflation now close to a peak, I think that the MPC’s hands will soon be free to shore-up economic activity by reducing interest rates again early next year. February is now the most likely date for the next cut.

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.

Deloitte & Touche LLP is based in 21 UK locations, with over 9,500 staff nationwide and fee income of £1,355 million in 2004/2005. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

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.