Saturday, Jun 09, 2007
The BOE horse continues to bolt
MSN: Economy gathers pace
The economy picked up pace in the three months to May, keeping up pressure for higher interest rates, the National Institute of Economic and Social Research said on Saturday. The thinktank estimates GDP rose by 0.8 percent in the three months to May compared with the previous three months (0.7%) - the fastest rate of growth in almost a year.
Posted by uncle chris @ 09:12 AM (132 views) Add Comment
1 Comment
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1. Pr said...
http://www.bankofengland.co.uk/publications/inflationreport/ir07may.pdf
I had a quick review of the BOE's last inflation report and a few things strike me as a being a bit odd, particularly in light of a 0.8% GDP rise. The May report's CPI fan graph prediction for CPI shows it being at about 2% by the end of the 2nd quarter (see page 40). Well, at 2.8% now, and the previous 3.1%, we are at the peak of the Bank's predictions, interestingly, the fans show that we have been at the peak of predictions since before January. Note that the BOE state a 10% chance of deviation from the predictions. There is therefore a 10% chance of CPI above 3.5% according the the BOE.
The same is true for GDP, 0.8/quarter or 3.2/yr is at the upper end of the central prediction. (see page 8).
It is a great shame that the BOE doesn't have a fan chart for interest rate probabilities and other measures of inflation, like RPI, etc. One would have to assume that, with GDP on the upside, CPI on the extreme upside and RPI and money growth in painful territory, that interest rates would be on the upper scales of any fan prediction chart. This explains the recent rout in bonds, the market interest rate of over 6%. If GDP continues to gets out of control at this point in the cycle, then the softly softly rise in interest rates approach (which feeds in over 2yrs) cannot and will not do anything to reign in the economy. The only solution will be a rout on interest rates in a similar fasion as during the last crash. Because only swift harsh rises will impact on short term inflation. Which, surely is necessary, if inflation gets out of control, particularly if wage growth starts to feed in by this time next year.
News just in that British Airways has just raised fuel sur-charges, the £1/litre petrol issue, $70+/barrel for oil suggests that domestic energy bills will spike again by christmas, or next spring at the latest. These events would surely combine to generate 3% + CPI and 7% interest rates, if energy prices are sustained, given that the majority of recent CPI falls are to do with energy, at a time when manufacturers are passing on higher costs.
It will be interesting to watch GDP over the coming months and see if it does indeed feed through to produce higher CPI and higher interest rates.