Bank of England, surprise, surprise or was it?
The only surprise was it was a month early right? Were we not aware that consumer price inflation was far above target at 2.7% and were we not aware that retail price inflation (which includes housing costs) was at a 9 year high of 3.9% and were we not aware that the housing market was again on an upward surge so the Bank had no alternative to act sooner rather than later.
In fact a rise above 3% would have forced Mervyn King the BOE governor to write a letter to Gordon Brown explaining why inflation had risen above the target level of 2%. Certainly it is now easier to write a letter with rates at 5.25% than 5%. I would guess that Mr King would have been privy to the CPI figures due next Tuesday and clearly the decision to hike would have been an easier one.
The aftermath now is that many (and the media too) in the markets are speculating that the next move is not far away with some even suggesting February because something nasty could be also lurking in the Bank’s quarterly inflation report (due on Valentines day incidentally).
However, rate rises can take anything up to 6 months (and beyond) to filter through into the economy. The Bank surely is in a stronger position to wait and see. Clues to this thinking may and we stress may, have been provided in the Bank’s statement that followed the rate rise.
It said it had raised rates because “the risks to inflation now appear more to the upside” than they had in November (the last time we saw the quarterly inflation report). It added “Consumer price index inflation was 2.7%. It is likely that inflation will rise further above the target in the near term but then fall back as energy and import price inflation abate.” Reassurance perhaps that inflation would return to target in the medium term, say 6 month?
Needless to say the reaction in the currency markets yesterday saw the pound rise to a 18 month high against the euro at 0.6630/40 (1.5060/80) and jumped to a one week high versus the dollar at 1.9538. It later pared some of these gains later in the US session after an unexpectedly low reading in US weekly jobless claims.
In Europe, the single currency reversed earlier gains to fall under 1.2900 versus the dollar as the European Central Bank left eurozone interest rates unchanged at 3.50%. The ECB’s decision came as no surprise. Mr Jean Claude Trichet (the ECB president) gave a clear indication that the ECB would wait until March before raising rates from its current levels.
The indication being that he didn’t use the word “vigilance”. A word that many an investor usually took as a sign the central bank will raise rates at its next policy meeting. Yes, we have to scrutinise words as well for any clues on direction!
Oil prices extended their declines as prices for Brent crude closed at $51.70 down $1.99 a barrel at levels not seen since June 2005. The decline has prompted talk that OPEC might seek further production cuts in an effort to defend oil prices in the mid $50’s. Might be worth noting that OPEC is not scheduled to meet until March….
On all of this interest noise and attention the focus will switch back to the US again today with the release at 1.30pm of the December Retail Sales. The expectations are for a rise of 0.7% versus the previous 1.0%. However, look for retail sales ex-autos to disappoint following November’s increase of 1.1%.
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
In fact a rise above 3% would have forced Mervyn King the BOE governor to write a letter to Gordon Brown explaining why inflation had risen above the target level of 2%. Certainly it is now easier to write a letter with rates at 5.25% than 5%. I would guess that Mr King would have been privy to the CPI figures due next Tuesday and clearly the decision to hike would have been an easier one.
The aftermath now is that many (and the media too) in the markets are speculating that the next move is not far away with some even suggesting February because something nasty could be also lurking in the Bank’s quarterly inflation report (due on Valentines day incidentally).
However, rate rises can take anything up to 6 months (and beyond) to filter through into the economy. The Bank surely is in a stronger position to wait and see. Clues to this thinking may and we stress may, have been provided in the Bank’s statement that followed the rate rise.
It said it had raised rates because “the risks to inflation now appear more to the upside” than they had in November (the last time we saw the quarterly inflation report). It added “Consumer price index inflation was 2.7%. It is likely that inflation will rise further above the target in the near term but then fall back as energy and import price inflation abate.” Reassurance perhaps that inflation would return to target in the medium term, say 6 month?
Needless to say the reaction in the currency markets yesterday saw the pound rise to a 18 month high against the euro at 0.6630/40 (1.5060/80) and jumped to a one week high versus the dollar at 1.9538. It later pared some of these gains later in the US session after an unexpectedly low reading in US weekly jobless claims.
In Europe, the single currency reversed earlier gains to fall under 1.2900 versus the dollar as the European Central Bank left eurozone interest rates unchanged at 3.50%. The ECB’s decision came as no surprise. Mr Jean Claude Trichet (the ECB president) gave a clear indication that the ECB would wait until March before raising rates from its current levels.
The indication being that he didn’t use the word “vigilance”. A word that many an investor usually took as a sign the central bank will raise rates at its next policy meeting. Yes, we have to scrutinise words as well for any clues on direction!
Oil prices extended their declines as prices for Brent crude closed at $51.70 down $1.99 a barrel at levels not seen since June 2005. The decline has prompted talk that OPEC might seek further production cuts in an effort to defend oil prices in the mid $50’s. Might be worth noting that OPEC is not scheduled to meet until March….
On all of this interest noise and attention the focus will switch back to the US again today with the release at 1.30pm of the December Retail Sales. The expectations are for a rise of 0.7% versus the previous 1.0%. However, look for retail sales ex-autos to disappoint following November’s increase of 1.1%.
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
posted by Drs Search @ 11:20 AM
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