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Bank holds rates as service sector disappoints

London, UK (09/05/2011)

This was supposed to be the month the MPC hiked rates. But not much chance of that happening, given all the economic doom and gloom...

How times change. At the start of the year, the City was expecting this to be the month when the Bank of England's Monetary Policy Committee finally started to increase interest rates from their record low of 0.5% - but at today's meeting, the nine-strong committee again voted to keep rates on hold for another month. That's hardly a surprise, in light of the gloomy data that's emerged on the economy in the last few months - most recently, today's numbers showing weaker-than-expected growth in the service sector - even though inflation remains miles above the Bank's target. And with UK consumers still struggling under a heavy debt burden (much like the Government), the Bank arguably doesn't have a lot of room for manoeuvre...

The good news is that today's Markit/ CIPS's PMI index does show that the service sector is growing - it's just growing more slowly than expected (the index fell to 54.3 in April, down from 57.1 in March and lower than the forecast 55.7). Coupled with similarly lacklustre numbers from the manufacturing and construction sectors this week, Markit's chief economist Chris Williamson less-than-cheerfully suggested this was 'the largest loss of growth momentum seen since just after the collapse of Lehmans.' In fact, he reckons GDP growth is currently running at a weedy 0.4%, even worse than last quarter's figure.

And we might want to start getting used to sluggish growth like this, if the economists at Fathom Consulting (home to MT blogger Erik Britton) are to be believed. At its latest Monetary Policy Forum, Fathom argued that if you strip out the snow factor and ignore the 'misleading' construction sector, the UK economy has been growing at an average quarterly rate of just 0.3% since the end of the recession, with demand no higher now than it was then. What's more, it suspects this isn't a temporary thing; in fact, it might 'represent the future' as the UK faces up to a 'difficult decade' paying down debt. As you'd expect, Fathom thinks rates need to stay as low as possible for as long as possible, to prevent consumer confidence sinking even lower.

Some argue that if the growth outlook is this gloomy, the Government needs to rein in its fiscal squeeze. But Fathom's not convinced: it argues that the threat of a sovereign debt crisis still looms large for the Euro; even Spain is 'on a knife-edge', it says, and this could have 'devastating implications' for the UK (since a Spanish default would push up the pound and force a fresh recapitalisation of our banks). That means the Government - like consumers - need to get on with balancing the books. In other words: if too much debt got us into this mess, paying down that debt is the best way out of it.

Not all commentators share a similarly rosy view of the Government's current approach. But one thing's for sure: if interest rates go up, it's going to make it harder for consumers to pay off their debts. We suspect the MPC might be sitting on its hands for a good few months yet.

For more information please click the following link:  http://www.managementtoday.co.uk/bulletin/mtdailybulletin/article/1068553/bank-holds-rates-service-sector-disappoints/



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