To a large extent, last weeks data was irrelevant in terms of Base Rate predictors. The Bank of England is convinced that the greatest prevailing threat is from recession and not inflation and money market rates hardly moved, as short supply remains the key determinant. Prices at the factory gate continued to soar last month, input prices up by 1.8% in the month and 20.4% for the year whilst output prices advanced by 0.9% and 6.2% respectively. The real culprits (to no ones surprise) were: crude oil (+7.8% m/m, +62.5% y/y), imported foods (+1.9% m/m, +18.4% y/y, home grown foods (+1.1% m/m, +33.4% y/y) and metals (+4.0% m/m, +9.6% y/y). Tuesday’s CPI figures were almost restrained, inflation rose by 0.4% in March maintaining the annualised rate at 2.5%. As we have stated oft times before, price rises are only a problem if we increase earnings or debt and so add more cash to the system. The level of earnings growth and employment was revealed on Wednesday; claimant count fell by 1,200 in March whilst the broader ILO measure registered a quarterly decline of 39,000. Average earnings for the quarter to March advanced by a modest 3.7%, which hardly presages the advent of hyperinflation.
Amid all the media hype, fanciful reporting and doom mongering the Bank of England has decided to act and address the “liquidity crisis” at source. The big banks are hovering cash to balance off ongoing sub-prime write offs and thus maintain their balance sheets consequently pushing up money market rates. The Bank’s plan is to swap the toxic paper for nice clean shinny Gilts. In theory, the banks can then lend to the market again, market rates will fall, eventually feeding through to consumers. How effective this plan is relies on the Bank accepting the real rubbish rather than the top rated paper. The toxic dump plan may work but it will be too late for RBS/NatWest/ABN, perversely the announcement of the largest rights issue in UK corporate history may actual help to calm the markets.
