BANK of England policymakers face one of their toughest calls on interest rates next week as they grapple with the "largest-ever peacetime liquidity crisis".
The bank's deputy governor, Rachel Lomax, said yesterday that the global credit crunch would act as "a significant drag" on demand in the UK economy over the next two years.
In a speech to the Institute of Economic Affairs, she warned that po
licymakers need to balance the risk of demand slowing sharply against a temporary rise in inflation becoming entrenched if people start expecting price rises.
"If price and wage setters start to expect higher inflation to persist, then the (Bank of England's monetary policy] committee will need to restrain demand," Lomax said.
Her comments came as the CBI's latest distributive trades survey highlighted the extent of inflationary pressures on the high street.
While sales ground to a halt in February, ending months of growth, retailers are poised to raise prices at their sharpest rate in
more than a decade.
The CBI said its quarterly price expectations balance surged to +48 – its highest reading since November 1996 – as store owners battle with soaring input costs. It's a finding that is certain to weight on members of the monetary policy committee (MPC) ahead of their rate-setting meeting on 5 and 6 March.
The committee's remit is to keep consumer prices inflationpegged at 2 per cent. However, the Bank's quarterly inflation report, published earlier this month, reiterated concerns about rising inflation. It said hasty cuts in interest rates as the economy slows could see inflation exceed 3 per cent in the coming six months due to strong food and energy prices. Howard Archer, chief UK economist at forecasting group Global Insight, said the CBI survey would make "pretty dismal reading" for the MPC.
He added that it highlighted the " unappetising combination of significantly faltering economic activity and rising inflationary mpressures that is currently dogging the UK economy." Archer said: "The Bank of England will be fervently hoping that muted consumer spending will dilute retailers' pricing power. We suspect this will gradually happen and that interest rates will come down slowly, but steadily."
The CBI report – conducted between 29 January and 13 February – follows last week's retail sales volumes figures for January from the Office for National Statistics (ONS), which revealed a monthon- month rise of 0.8 per cent.
Paul Dales, of Capital Economics, said that, with the CBI survey recording a fall in sales this month, the ONS data could have
been a "last hurrah" for the sector as a consumer slowdown bites.
Ian McCafferty, chief economic advisor to the CBI, said: "The high street has been slowing gradually since last April and sales earlier this month were very subdued, while prices have risen strongly.
"Reflecting the increasingly tough conditions faced by the sector, business sentiment and investment mplans have both taken a hit."
Today's revised estimate of fourth-quarter GDP is also likely to be studied closely by the nine members of the MPC ahead of
next week's meeting, as will Nationwide house price data, due to
be released tomorrow.
Allan Monks, an economist at JP Morgan, said: "Our broad take on MPC commentary currently is that the committee is prepared to respond to weaker growth by cutting rates more aggressively than flagged in the February inflation report, but it needs the data to push it to do so."
BUSINESS INVESTMENT DIPS
UK BUSINESS investment fell to its weakest quarterly rate in three years during the fourth quarter, indicating the economic slowdown could be sharper than expected.
Data from the Office for National Statistics showed total business investment declined 0.5 per cent on the previous quarter, following asharp drop in private-sector investment in construction and stagnation in services investment. That marked the weakest quarterly rate since investment fell 1.5 per cent in the final quarter of 2004, the ONS said. Over the year, business investment increased by 1.7 per cent – the lowest annual growth rate since the third quarter of 2005.
Howard Archer, chief UK economist at Global Insight, said the drop in the fourth quarter was "very disappointing and does not bode well for future growth".
The full article contains 704 words and appears in The Scotsman newspaper.
