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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (10006)	7/29/2004 8:24:13 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Independent Data on Fund Flows & Holdings Message 20360309

To: Wyätt Gwyön who wrote (10006)	7/29/2004 8:27:43 PM
From: mishedlo	Respond to of 116555

UK´s BoE should pick up pace of monetary tightening - NIESR UPDATE Thursday, July 29, 2004 11:18:23 PM UK's BoE should pick up pace of monetary tightening - NIESR LONDON (AFX) - The Bank of England should raise the cost of borrowing another half point next week to curb mounting inflationary pressures stemming from diminishing spare capacity in the economy, a leading think-tank said today In its quarterly review, the National Institute of Economic and Social Research said the BoE's approach of "rather leisurely tightening" has not done much to stem price pressures as it has done little to alter expectations The central bank's rate-setting Monetary Policy Committee is not expected to heed NIESR's advice and is tipped to increase interest rates by a quarter point next week, taking its key repo rate up to 4.75 pct The MPC has raised borrowing costs by a quarter point on four occasions since last November "There is a strong case for the MPC to influence expectations more forcibly by raising the repo rate by half a percentage point," said NIESR, adding that such an aggressive move could have a "major impact" on inflation. NIESR is predicting consumer price inflation to edge up to 2.1 pct by the end of 2005, above the MPC's 2.0 pct target Elsewhere, NIESR said it expects the UK's economy to grow by 3.3 pct in 2004, in line with the Treasury's forecast, as the economy fires on all "three domestic cylinders" NIESR forecasts that the output gap is near to closing, leading to a rise in inflation, which will in turn be further pressured by high oil prices It predicts consumer price inflation will edge up past the BoE's 2.0 pct target, and stay above that level in 2006 and 2007, assuming that the central bank continues to hike rates gradually The only drag on growth this year is trade, which is likely to cut GDP growth by 0.6 pct, it said However, growth in the following year is expected to slow down to 2.7 pct, below the Treasury's projection of growth of between 3.0-3.5 pct NIESR warned that the main risk to economic growth over the next few years is a decline in house prices, which NIESR believes are currently 30 pct over-valued A fall in house prices to long-run levels would cut annual GDP growth by around a quarter of a percentage point per year between 2005 and 2008, it warned The greatest decline is expected to be seen in 2006, when growth would be cut by almost half a point, NIESR said But NIESR said its forecasts are based on the assumption that house prices will fall gradually, indicating that a slump would have a signficant impact on GDP growth It suggested that, with signs of the housing market overheating, it would be sensible for the Bank of England to nip the problem in the bud by implementing sharper rises in interest rates Wednesday's statement by Bank of England Monetary Policy Committee member Charlie Bean said the central bank "is not in the business of trying to clobber the consumer", however, suggests that the MPC is concerned not to disrupt financial markets or to hit confidence by unexpectedly large hikes Once again, NIESR warned that UK fiscal policy is "unhelpfully expansionary", with government borrowing set to remain around 3 pct of GDP over the coming two yeas "This means that the Bank of England has to push up interest rates higher than would otherwise be necessary," NIESR said As a result, there could be harmful effects on exports as the pound appreciates If the government were to suddenly change its policy and rein in spending, it would result in downward pressure on inflation, interest rates not having to be as high, and would rebalance domestic and external demand, NIESR said fxstreet.com