Despairing Doves
31 / Aug / 2008
The Bank of England’s Monetary Policy Committee’s David Blanchflower’s interview to Reuters last Thursday convinced many dealers that a Base Rate cut by November is now possible. Blanchflower, a noted policy “dove”, has pushed for lower rates for some months now. His main concern is that the Banks forecast for zero growth for 2009 is “wishful thinking” and that the UK economy is already contracting to the point where 2 million unemployed by Christmas is actually quite likely. One consequence will be an acceleration in house price deflation; he predicts an annualised fall of 30% by late December. Whilst we feel that this overstating the case, house prices will continue to fall and the effect on aggregate demand will be severe. As a consequence of his interview Sterling’s value on the exchanges collapsed. The main argument for a tighter monetary policy is that consumers are raising their expectations of future inflation levels and so will demand salary increases to compensate creating an inflationary spiral. To date this appears not to be happening, furthermore increasing levels of unemployment have historically served to reduce wage demands and should do so now. Analysts now believe that Blanchflower’s argument will prove to be more persuasive and the majority of the Committee will agree sooner rather than later.
Last weeks’ data, little though there was, appeared to confirm the ”Doves” theory. The Nationwide reported that House prices fell by a whopping 1.9% last month pushing the annual rate to –10.5%. The CBI’s survey of the retail sector concluded that sales volumes are declining at the fastest rate since 1983!
This week the BBA releases July’s consumer debt figures; the predictions are for unsecured debt to advance by £0.8bln, mortgage lending to increase by only £3bln with only 35,000 mortgage approvals. The Halifax also reports on its view of the housing market for August and is likely to show a monthly decline of 1.8% and an annual fall of 10.7%. On Thursday the Bank will announce that Base Rate will be held at 5.00% (you heard it here first!)