Bank of England is the focus of Wise Money this week

The lack of Interbank lending is weighing heavily on the price of real money in the market place, as we continue to see disparity between LIBOR rates and BASE rates, with the benchmark 3 month LIBOR fixing at 5.89pct on Friday (against 5.00pct BASE).

The question is how long will this continue and what will the powers that be implement to attempt to bring levels back towards parity? In the current climate investors have the ability to lock in to favourable deposit rates, see levels above.

In home news - The Bank of England is due to announce plans to stimulate lending between banks by effectively taking the under performing assets which are linked to residential mortgages from their balance sheet and swapping them for Gilt edged securities which are effectively backed by the labour Government.

These transactions could carry a haircut of around 20%. There are many associated risks - This will take time to filter through the system and the restoration of confidence will not be immediate, lenders may chose not to pass on reductions in Base rates to home owners while the price of liquidity remains inflated.

Oil prices continue to rise, with record levels posted last week at $117 a barrel. OPEC announced that strengthening demand coupled with the weak US Dollar were pushing prices up. Many now expect oil to go through $120 by the summer.

The stock markets posted small gains last week with the FTSE 100 ending the week up over 200 points higher at 6,056.5

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.

UK interest rates stay at 5.25 per cent

Interest rates were left unchanged at 5.25 per cent on Thursday, but the City remains convinced that further increases in the cost of borrowing are just around the corner.

The Bank of England’s decision to stay its hand suggests that the majority on its monetary policy committee (MPC) were prepared to wait to see what effect the three 0.25 per cent percentage point increases since August will have on demand in coming months.

It also may point to a fall back in the consumer price index measure of inflation for January, on which the official report will have been given to the MPC prior to their vote.

The jump in CPI inflation to 3 per cent in December, a full 1 percentage point above the Bank’s 2 per cent target, is one of the main reasons for the rate increase in January.

A majority of economists had expected no change in monetary policy on Thursday, but markets were nervous after last month’s surprise quarter point hike.

A survey by Bloomberg showed only 8 out of 50, or 16 per cent, of analysts thought the monetary policy committee would vote to raise rates for the second consecutive month, to 5.5 per cent.

However, 43 per cent of respondents see interest rates at 5.5 per cent or higher by March, and this rises to 74 per cent for rates to be at that level or higher in May.

Investors’ attention will now turn to the publication on February 14 of the Bank of England’s latest quarterly inflation report for a guide to the Bank’s thinking. A week after that the minutes of Thursday’s MPC meeting will be released.

The minutes of the January meeting showed a committee more deeply split about whether to tighten monetary policy than had been expected.

However, for many in the 4 to 5 minority who wanted to keep rates unchanged, their decision was based on a matter of timing rather than direction.

Because of this, a tightening bias is likely to persist within the MPC. And recent data may have only marginally tempered this view.

Surveys of the service sector show continued robust, though slightly slower, growth, while manufacturers appear to be coping, so far, with the strong pound. Significantly, both sectors are showing evidence that companies are enjoying a bit more pricing power.

Retailers, in contrast, still need to offer discounts to entice buyers, but not to the same extent as in the recent past. Consumer spending also remains relatively robust, and a better than expected Christmas has not been followed by a weak new year according to industry data.

Anecdotal evidence of pay negotiations suggest workers are prepared to ask for inflation-beating wages in order to compensate for higher living costs, an area of particular concern for the MPC.

Finally, asset prices continue to rise. The Bank of England says it does not directly target asset prices, but it has made clear that they can add to inflationary pressures as households can feel wealthier and increase spending accordingly.

The Halifax said on Thursday that house prices are rising at an annual rate of 9.9 per cent - though it did warn that recent volatility in prices on a month-on-month basis suggested a cooling market. Weaker mortgage approvals data appear to support this view.

In addition, equities are at fresh six-year highs, buoyed by merger activity.

Though borrowers may have welcomed Thursday’s decision by the Bank, a respected economic think-tank will have been disappointed by the MPC’s reticence.

The National Institute of Economic and Social Research (Niesr) on Thursday called for “at least one further interest rate increase in order to keep inflationary pressures in check”.

Publishing its projection that the economy grew by 0.8 per cent in the three months ending in January, Niesr reiterated its belief that monetary policy should be used to influence expectations.

It went on to say: ”For this reason and bearing in mind the recent pattern of pay settlements, we think that the Bank of England should err on the side of caution and raise the interest rate again this month.”

Niesr may get its wish in March.

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.