That Rate Cut (BoE): The Questions Remain
So they did the dirty deed.
As forecast yesterday by The Fool, the Bank of England’s Monetary Policy Committee (MPC) has voted to reduce the Bank Rate by 0.25%.
But two more questions remain to be answered:
First, was the rate cut a good idea?
And second, how did the market know it was about to happen?
We weren’t surprised to see the move, because evidence of a stuttering economy had been accumulating for several days. Falling house prices, faltering mortgage approvals, soggy service sector surveys, crumbling consumer confidence, even restaurant profit warnings…the signs were there that the Brits are splashing less cash around.
But what about rising prices, supposedly the MPC‘s prime responsibility?
Again, the warning lights are flashing.
The same CIPS/RBS service sector survey which saw slackening activity growth also reported soaring input prices being paid by contributors. Pay pressures are building up too, particularly in the motor industry, with wage inflation rising 3.5% in the three months to November.
The Bank’s own November Inflation Report confessed to increasing concern that the consumer price index (CPI) might rise faster than expected.
And today’s official statement admits that higher food and energy costs are likely to keep the CPI above the 2% target in the short-term, and also that there’s a risk of prices rising even higher.
Then, against this background of potential inflation, comes the astonishing assertion from the MPC that a base rate cut is “necessary” to meet the medium term 2% inflation target.
Necessary? Really?
So prices are already rising too fast, fuelled by international commodity prices like oil and food which the Bank cannot control…and the MPC decides to lower borrowing costs?
Are Merv and the gang trying to say that without a rate cut, CPI would be lower than 2%?
I don’t think so. I believe that fearful of getting even more post-Rock flak, the MPC has caved in to pressure from, amongst others, the City.
Looks like inflation has now become the Bank’s sub-prime concern.
Which brings me onto my second beef…how did the market know about the rate cut?
The FTSE 100 index closed on Tuesday at 6316. On Wednesday morning it opened more than 50 points higher despite Wall Street having closed lower, and gained another 30 ticks quite quickly before trading in a narrow band until about 1.30pm.
Then suddenly, FTSE started motoring upwards, reaching 6494 by the close of play and gaining a further 100 points by the time of the Bank’s statement at 12 noon.
That’s a near 3% move in less than a day’s trading.
Would you also believe that no sooner was the rate cut announced, FTSE came crashing down again, losing 150 points by 2 o’clock? And all concerning an event that most City ‘experts’ said wouldn’t happen.
Yesterday I ventured that it might be unfair to suggest that the Bank’s proximity to the City big guns in any way influenced the decision.
I’m saying nothing more. I’ll leave you to draw your own conclusions.
[source~http://www.fool.co.uk/news/investing/investing-strategy/2007/12/06/that-rate-cut-the-questions-remain.aspx?source=uooartrf1010001]
