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December 3, 2007

Base rate cut dependent upon medium-term inflation worries

by Gill Montia

Story link: Base rate cut dependent upon medium-term inflation worries

The Bank of England’s Monetary Policy Committee (MPC) will meet this week to set the base rate for December.

While analysts agree that a rate cut will occur soon, opinions vary as to whether it will happen this week.

The Bank’s Inflation Report for November indicates that interest rates need to come down by next summer to ensure that the economy grows sufficiently to keep inflation at the Government’s 2% target.

October saw a slight increase in consumer price inflation to 2.1%, as compared with 1.8% in September.

However, this small rise is not expected to be the Committee’s main concern as the focus is currently on the medium-term outlook for inflation.

Increases in fuel and other costs resulted in a 3.8% rise in the price of goods leaving UK factories in October and this, plus more expensive imports, could mean that retailers pass on higher costs.

A recent CBI survey shows retailers reporting the greatest price pressure since mid-1998.

There are however, indications that consumer demand could be diminished by falling asset values.

According to the Nationwide building society, house prices fell by 0.8% in November, the steepest fall for 12 years.

At the same time, November’s stock market performance saw a 4.3% drop in the FTSE 100 index, its sharpest drop since May of 2006.

The growth in earnings stands at 4.1% and is therefore well below the Bank’s 4.5% target, but is nevertheless at its highest for seven-months.

 

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