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

To: mishedlo who wrote (21361)	1/14/2005 8:00:37 AM
From: mishedlo	Respond to of 116555

DELOITTE on UK interest rates Economic Update - Lower interest rates may not be too far away Roger Bootle's response to January's MPC meeting deloitte.com It was no surprise that the Monetary Policy Committee left interest rates on hold at 4.75% for the sixth consecutive month in January. But given that policy in the coming months is likely to be dominated by the housing market and the performance of retail sales over the crucial Christmas period, I believe that the first interest rate cut might not be too far away. Although the Halifax recorded a surprisingly strong 1.1% increase in house prices in December, the overall picture is still consistent with a major price correction. Indeed, the 0.2% fall on the Nationwide index meant that at least one of the two main house price indices has fallen in each of the last five months. What's more, the Bank of England's new number of mortgage approvals series fell for the sixth consecutive month to its lowest level since September 1995, confirming that the housing market downturn is still in full swing. Housing market weakness is likely to have had at least some impact on retail sales, although the latest indicators have been mixed. The CBI's reported sales balance rose sharply from +19 in November to +22 in December. But the fall in the annual like-for-like growth rate of the BRC's retail sales monitor from -0.2% to -0.4% was more consistent with announcements from high street retailers such as Woolworths and Allders that sales activity over the Christmas period was weak. Admittedly, the rise in the headline growth rate of average earnings from 3.8% to 4.1% in October, and the jump in CPI inflation from 1.2% to 1.5% in November, increased concerns that inflationary pressures are building. But at 1.5%, CPI inflation is still comfortably below the 2% target. Moreover, strong productivity growth pushed the annual growth rate of unit wage costs – arguably a more relevant measure of inflationary pressures in the labour market – to an eight year low in Q3. A unanimous vote in January, as is likely, would suggest that it may be some time before a majority votes for lower interest rates. However, the MPC has already discussed the possibility of lower interest rates, at December's meeting. And at the last turning point in the interest rate cycle towards the end of 2003, it took just two months for the Committee to swing from a unanimous vote for no change in interest rates to an 8-1 majority in favour of a hike. I have said that the first cut in rates will come in May but that could clash with the likely timing of the general election. If this month's data show marked weakness for the housing market and/or retail sales then the cut could come as early as February – the next Inflation Report month. I believe that interest rates will fall to 4.0% by the end of this year, before dropping to 3.5% in 2006. Roger Bootle Economic Adviser Deloitte