Expectation of a rate cut is low as inflation rises

30 May 2008 / by Joy Tibbs
A new survey put together by Citigroup and YouGov shows that the public's concerns over rising inflation may cast doubt over further Bank of England base rate cuts.

The latest monthly Citigroup survey recorded that the prediction of future inflation hit a record for a fourth month running. The research showed that 34 per cent of people believe inflation will be five per cent or higher in 12 months compared with 12 per cent of respondents in December 2007.

On average, each respondent expected consumer price inflation to reach 4.1 per cent in 12 months compared with the average prediction of 3.1 per cent in February, and well exceeding the Government's target of two per cent. A mere 13 per cent of those questioned predicted that inflation would be two per cent or lower in 12 months compared with 32 per cent last December.

The Bank of England's Monetary Policy Committee (MPC), which is responsible for deciding whether rates should be changed or not, is likely to be influenced by increasing speculation about higher levels of inflation. Soaring living costs have been a cause of concern for many people, and this may dissuade the MPC from implementing further rate reductions.

The decision to keep rates steady at five per cent on May 8 was almost unanimous among MPC members, much to the disappointment of many mortgage customers. Rates have been slashed three times since December 2007, when the base rate was 5.75 per cent, and the next decision is due on June 5.

UK equities fund manager at Invesco Perpetual, Martin Walker, said: "With the consumer prices index (CPI) at three per cent and the inflation report guiding to little short-term relief from rates. Inflation appears to be primarily driven by food and fuel. Food is quite interesting because in the CPI basket, it is up eight per cent on the year, while both Tesco and Sainsbury have reported inflation of two per cent or less.

"My question is: which is it? Is it half of wage growth or twice wage growth? The answer to the question is important, particularly as we go into the autumn wage negotiations. It looks unlikely that we will see an interest-rate cut in June."

And speaking at a conference in Hong Kong on May 27, HSBC's chief executive, Michael Geoghegan, said: "Inflation is a long-term problem because there is no long-term will to solve it. In the short term, it will need an increase in interest rates. I'm not sure governments wish to face up to that, but I urge them to, because inflation out of control is a very difficult thing to control later."

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