Bank of England To Hike on November 9, But What Happens in 2007?

By: Victoria Marklew | Thu, Oct 19, 2006
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The latest crop of data out of the UK supports the assumption that the Bank of England's Monetary Policy Committee (MPC) will be hiking the repo rate to 5.0% on November 9. The key question, of course, is whether that will be the last such tightening at this stage in the cycle, or whether one or two additional hikes will be needed next year. At this point, the best we can do is invoke the usual economist's mantra - watch the data. In particular, watch the inflation, housing market, and labor market data over the next couple of months.

Today's data hinted that the labor market may be softening. Average earnings growth slowed a tad more in August, rising 4.2% in the three months to August, compared with 4.4% in the three months to July.

The September claimant count unemployment level jumped to 962,000, the highest level since December 2001, although the jobless rate on this measure remained at 3.0%. According to the broader, internationally-comparable ILO unemployment measure, the August jobless rate rose to 5.5%. However, the hint of softening is not yet a trend.

Yesterday's headline EU-harmonized consumer price inflation for September didn't look too bad, easing to 2.4% on the year as petrol prices came down. However, annual retail price inflation - the measure on which many UK pay deals are based - climbed to an eight-year high of 3.6%. This is the kind of number that will have the members of the MPC fretting about wage pressures.

Today also saw the release of the minutes from the October 5 MPC meeting, at which two of the nine members voted for an immediate rate hike, arguing that consumption is strong and price pressures are picking up. The other members agreed with this assessment but worried that an unexpected hike would boost market expectations of further moves and so provide "an additional degree of tightening which was not required."

Meanwhile, BoE Governor King continues to state that wage and cost pressures need to be monitored closely, that any dip in inflation at the end of Q3 is likely to prove temporary, and that policymakers need to look beyond short-term fluctuations in oil prices.

All told, there is little doubt that the Committee members anticipate a 25bp rate hike on November 9 - but plenty of doubt about where the economy and interest rates are headed in 2007.



Victoria Marklew

Author: Victoria Marklew

Victoria Marklew

Victoria Marklew
Vice President and International Economist
The Northern Trust Company
Economic Research Department
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Victoria Marklew is Vice President and International Economist at The Northern Trust Company, Chicago. She joined the Bank in 1991, and works in the Economic Research Department, where she assesses country lending and investment risk, focusing in particular on Asia. Ms. Marklew has a B.A. degree from the University of London, an M.Sc. from the London School of Economics, and a Ph.D. in Political Economy from the University of Pennsylvania. She is the author of Cash, Crisis, and Corporate Governance: The Role of National Financial Systems in Industrial Restructuring (University of Michigan Press, 1995).

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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