Issues facing the MPC

The bank of England's Monetary Policy Committee holds its pre-meeting today, with the formal meeting on 4 and 5 October. Gabriel Rozenberg of the Times provides a useful summary of the issues facing it: Bank's nine digest the work of 100

At 8.45 this morning, nine bleary-eyed men and women in a lecture theatre high above Threadneedle Street will struggle to comprehend the entire economy.

Every aspect of economic life is on display for the interest rate-setting members of the Bank of England’s Monetary Policy Committee at the regular pre-MPC meeting, which takes place on the Friday before each month’s rate-setting meeting. The daunting presentation lasts about four hours and features scores of graphs and charts, created by 100 Bank staff crammed into the seats behind them.

...Growth: services slowdown
The economy grew more slowly in the second quarter than hoped, expanding by 0.7 per cent. That is in line with the long-run trend, but will make the Bank’s growth forecast for the year very difficult to reach.

In addition, the third quarter seems to have started slowly, with service sector output falling by 0.3 per cent in July and the PMI surveys showing unexpected weakness. However, retail sales remained robust in August and CBI data suggest that they enjoyed a healthy September as well.

Prices: rising strongly Inflation strengthened to 2.5 per cent on the consumer price index in August, the fourth successive month above the Bank’s target of 2 per cent.

Pipeline price pressures appeared more under control, with output price inflation dropping back in response to a large fall in the cost of fuel and scrap metal.

Unemployment may have stopped rising over the summer, although it was hard to be certain as the two measures of joblessness pointed in different directions.

There were also mixed signals on housing. Gross mortgage lending reached a new high of £32.7 billion in August, and Nationwide reported the fastest house price rises since February last year. But the rise in new mortgage approvals recorded by the British Bankers’ Association was modest.

The international economy
The eurozone looks set to become less supportive of UK growth in the months ahead after a weak business confidence survey of Germany from the Ifo institute, which edged down to its lowest level since February.

Meanwhile, across the Atlantic traders are starting to price in a cut in interest rates by January, following the softest Philadelphia Fed survey of manufacturing for 3½ years. The evidence is that the housing market is continuing to weaken.

I agree with the articles verdict for a 'probable hold' on rates this month - as do those polled recently by Reuters. A November rate hike is more likely, though there is no rush.