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Bill Midgeley, Chamber of Commerce, North East
"Interest rates are a knee jerk reaction"
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Tuesday, 11 January, 2000, 21:07 GMT
UK interest rate guessing game

Eddie George Eddie George says interest rates should be predictable

By BBC economics reporter Chris Giles

"Interest rate decisions should be boring and predictable." That's what Eddie George, the Governor of the Bank of England, and his deputy Mervyn King never tire of saying.

The Property Maze
They add that the next decision by Monetary Policy Committee (MPC) can be accurately guessed by studying what was said at the previous meeting and comparing that with what has changed in the economy since.

At December's meeting, rates were left on hold at 5.5%, but three members of the committee (Mervyn King, Willem Buiter and John Vickers) voted for a quarter of a percentage point rise. And some members who voted to keep rates unchanged expressed the view that rates would probably have to go up relatively soon.

So if you take Eddie and Mervyn's advice on board, not much needs to have changed to make the MPC take action and raise rates on Thursday. That is certainly what city economists believe. In a poll last week, 27 economists out of 33 predicted a rise in rates to 5.75%. One economist thought rates would go up to six per cent.

Changes since December

The key thing that has changed is that demand in the economy seems stronger than previously thought.

Figures for the size of the economy were revised up, as were most forecasts for 2000, consumer borrowing is surprisingly high, turnover at the major shops rose by 5.6% in December and house prices continue to boom, not only in London and the South East of England.

Alone that would probably be enough to tip the balance, but world demand also looks stronger now than it did last month.

That should help exporters and manufacturers further. Incidentally, manufacturing is now growing faster than services despite their regular complaints that the economy is run against their interests.

And earnings seem to be rising much faster than prices, the figures released last month showed average earning growing by 4.9%, driven upward by those most popular professionals, estate agents and car dealers.

Interest rate decisions should be boring and predictable
Eddie George

On the flip side, there has been another small rise in the value of the pound, which will make imports cheaper and put downward pressure on inflation. But the vast majority of economic figures out in the past month have indicated a stronger economy than was previously thought, so it would be a surprise if interest rates were left at 5.5%.

No inflation now.

Underlying inflation remained unchanged in December at 2.2% - a little below the official target of 2.5% - but comfortably within the one percentage point range set by Government. Currently there are few signs of inflationary pressure despite the pick up of the economy.

The crucial question now is whether inflation will rise as the economy gather further momentum.

The analysis of past economic data can't answer that nor can the MPC do more than produce a forecast based on past evidence. It suggests there should be signs of higher inflation by the end of the year.

If there are still few signs of inflation come the end of the year and the economy has had a successful 12 months, the Monetary Policy Committee is sure to come under pressure to change it's decision making strategy.

Unfortunately for Eddie and Mervyn, that would make interest rates less predictable again.

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See also:
15 Dec 99 |  Business
Brown backs rate rise
15 Dec 99 |  Business
Unemployment at 20-year low
13 Dec 99 |  Business
UK inflation edges up
20 Dec 99 |  Business
UK pay rises 'slowing'
22 Dec 99 |  Business
Bank split over rate decision

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