The decision, announced at noon today, was supposed to be one of the closest in recent months, as the Bank tries to navigate a path between the Scylla and Charybdis of rising inflation and a slowing economy. After last month’s vote, which was split 7-1-1 (between hold, hike and cut), there were some suggestions that this time round it could be even closer. But although we won’t find out the exact split for a couple of weeks, clearly the consensus opinion was that any kind of movement up or down is still too risky.
The decision may have been made slightly trickier by more grim news today on the housing market (or great news, depending on your point of view). According to the Halifax, prices fell by 1.7% in July, and are now nearly 9% lower than they were this time last year. We’re now back at the levels of June 2006, apparently (which of course hardly makes it cheap). Halifax said pressure on household incomes and the reduction in mortgage financing was pushing down prices and constraining activity levels.
Of course the Bank’s Monetary Policy Committee had a reasonable argument for all three of the options open to it today. Its main goal, as set by the Government, is to keep inflation within a percentage point of 2% - and since it’s currently running above 4%, the MPC is clearly failing to meet that target. So in this sense, hiking rates to control prices seems like a good idea. On the other hand, with every conceivable economic indicator pointing to a prolonged downturn, if not a recession, cutting rates could actually be a helpful way to get people spending again and jump-start the economy.
So since a cut might make inflation worse, and a hike might slow growth even further, holding rates at 5% was always going to be the most likely outcome today. Particularly now there’s a ray of hope on the horizon: with the oil price dropping below $120/ barrel and commodity prices apparently stabilising, there’s a reasonable chance that prices might start to fall in the relatively near future, bringing inflation back under control – which would allow the Bank to put up interest rates.
But until this happens, ‘wait and see’ appears to be the most sensible decision all round...
In today's bulletin:
Bank plays it safe despite further housing falls
Barclays surprises despite profit slump
Is a woman's place in the home?
City women lagging behind on pay
Whole lot of pain for Whole Foods