What the Bank of England has to weigh up next week
By Sumeet Desai
LONDON, Feb 27 (Reuters) - Hardly anyone expects the Bank of England to raise interest rates for the second month running next week, but with every indicator showing an economy running ahead, analysts say more hikes are just a matter of time.
All but one of 45 analysts polled by Reuters this week expected the Monetary Policy Committee to keep borrowing costs pegged at 4.0 percent next Thursday.
With inflation well below target and uncertainty running high about the effect rate hikes will have on debt-laden consumers, most analysts feel that the central bank will only raise interest rates slowly, and not repeat February's quarter-point hike as soon as next week. The following are the main factors that the nine-member MPC will consider at their two-day meeting next week.
CONSUMER DEMAND
This remains surprisingly strong. Retail sales beat expectations again in January, rising by 0.6 percent, and recording their best Christmas period since the boom days of 1987.
An index of consumer confidence fell slightly in February after the BoE's last hike but so far there is little evidence to suggest this is translating into weaker sales on the high street.
STERLING
The pound has been volatile since the last MPC meeting, rising to 14-month highs on a trade-weighted basis this week. Though it has since eased back slightly, its strength should have a downward impact on inflation and growth, reducing the need for rate hikes.
But minutes of the last MPC meeting showed that some MPC members thought the pound's strength should be disregarded for monetary policy purposes unless it started affecting wage or price-setting.
HOUSING MARKET
The BoE has long warned that the current rate of house price inflation is unsustainable and wants it to slow gently. But so far there is little evidence that the two rate hikes since November have cooled the market, which indeed appears to be re-accelerating. The Nationwide house price index jumped 3.1 percent on the month in February, its strongest rate in nearly two years.
CONSUMER DEBT
Nor is there any sign that the MPC's other bugbear, roaring consumer debt, is about to slow down despite the rate hikes. Certainly, industry figures showed mortgage lending rose at its fastest rate since November 2001 in January and an index produced by HSBC (LSE: HSBA.L - news - msgs) bank showed consumers' appetite for debt much higher than a year earlier even after this month's rate hike.
INTERNATIONAL ECONOMY
The global economy continues to improve though the MPC will be worried about whether the euro's rise against the dollar threatens to derail recovery in the euro zone. But the single currency is currently off its highs as speculation grow that the European Central Bank may discuss cutting rates at its next meeting on Thursday.
MANUFACTURING
This also appears to be improving as global demand picks up. The Confederation of British Industry said manufacturers' order books were at their best level in three years this month.
INFLATION
The MPC explained its last rate hike by saying it saw inflationary pressures building over the medium-term. The BoE forecasts inflation hitting its 2.0 percent target in two years and rising after that. But inflation currently remains very low.
OVERALL ECONOMY
GDP rose by 0.9 percent in the fourth quarter of 2003 and earlier estimates of growth have been revised up to show GDP expansion of 2.3 percent in 2003.
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