Economy Faces Big Challenge
Inflation is rising; the stock market is falling; banks in the US are going under. Where should the Bank of England head next with the interest rate? There are some big challenges ahead for the Bank of England’s Monetary Policy Committee.
Inflation hit 3.8% earlier this week and is forecast to rise ‘substantially’ above that later in the year. The new chief economist at the Bank of England, Spencer Dale, said there would be a ‘squeeze on real income’ as wage growth was reported to be sluggish and unemployment figures were gloomy.
The FTSE100 index has been falling like a stone of late, and, banking stocks in particular have taken a beating as they are showing few signs of emerging from the credit crunch. In the UK Lloyds TSB looks set to show its biggest fall in profits since 2002; Bradford & Bingley and the Halifax are struggling with their rights issues as their share prices have fallen below the offer price. In the United States IndyMac became the fifth bank to close this year, and Fannie Mae and Freddie Mac are in big trouble, which could also have a knock-on effect on the Asian market.
The risks of recession loom large on both sides of the Atlantic. In the US, relentless cuts in interest rates do not seem to have had the desired effect. In the UK, a wait-and-see policy has possibly indicated that the Bank of England knows it is powerless to stop the economic tide and is hoping to ride it out without overreacting one way or the other. Every month seems to bring different calls from different analysts for the way interest rates should go. The latest thinking is that the next move for rates will be down, as the economy needs a boost. The fear has been that a cut in rates might fuel inflation, but even the rise in inflation is largely out of the hands of the Bank as the prices of commodities around the world continue to rise.
A real fear is that employees will start to demand higher wage increases to combat the rise in the cost of living. Dale commented that the Monetary Policy Committee at the Bank faces its most challenging environment since it came into being. It’s hard to disagree.
