Thursday, October 19, 2006
Interest Rates due to rise
Bank hints at rise in interest rates next month despite growing unemployment Larry Elliott and Angela Balakrishnan Thursday October 19, 2006 The Guardian The City was last night preparing for a November rise in borrowing costs after the Bank of England dropped a broad hint that it would shrug off growing unemployment and increase interest rates. Despite the number of jobless benefit claimants hitting a five-year high last month, the minutes of the last meeting of the Bank's monetary policy committee (MPC) strongly suggested that a tightening of policy was imminent. The two new members of the MPC - Andrew Sentance and Tim Besley - voted for an immediate increase in rates to 5%, and the minutes showed that most of the other seven objected to dearer borrowing only for reasons of timing. "Other members placed considerable weight on [the arguments] supporting a further rise in the bank rate, but thought there was no pressing need to raise rates this month," the minutes said. They added that it would be helpful to wait until the Bank's quarterly inflation report before making a decision. The MPC will next decide on rates on November 9. The minutes said the Bank's agents across Britain were picking up evidence of firms seeking to raise prices. A sharp drop in oil costs meant inflation as measured by the Consumer Price Index fell from 2.5% to 2.4% last month. But had it not been for cheaper petrol, inflation would have been 3.1%. Mervyn King, the Bank's governor, is obliged to write an explanatory letter to Gordon Brown when inflation deviates from its 2% target by more than one percentage point. "If any further confirmation that interest rates will rise in November was needed, the minutes to the October MPC meeting provided it," said Paul Dales, UK economist at Capital Economics. "But the subdued tone of the labour market data questions how far rates need to rise thereafter, if at all." Data from the Office for National Statistics showed that the number of people out of work and claiming benefit rose by more than 10,000 in September to just over 960,000. At that rate of increase, the total would pass 1 million early in 2007, but some analysts believe that a pick-up in growth this year will apply the brakes. The broader measure of unemployment - the labour force survey - found that numbers rose by 45,000 in the three months to August, pushing up the jobless rate from 5.4% to 5.5%. Figures for average earnings showed that wage pressure remained muted. Earnings in the three months to August were up 4.2% on a year earlier, compared with a 4.4% increase in the three months to July. Excluding bonuses, average earnings growth eased to 3.6% in the three months to August from 3.7% in the previous three months, the lowest rate for more than two and a half years. The data suggested that soaring utility bills and rising inflation had not yet fed through to wages, but economists said the Bank of England would still be worried about inflation risks. Employment also rose by 120,000 over the three months, taking the total to 29.01 million - the highest since records began in 1971. Yet the number of jobs failed to keep pace with a labour force swelled by immigration and more older workers. "The increasing slack in the labour market should help to contain wages growth and dilute the need for further interest rate hikes after the likely one in November," said Howard Archer, an economist at Global Insight.