Actions speak louder than words

The Bank of England inflation report announced Wednesday made for uncomfortable reading, as prospects for economic growth have again been downgraded, and inflation is expected to remain elevated for longer.

In the report, the Bank indicates that inflation will sail past 5% later this year, citing energy costs as being a major contributor. One could be forgiven for not remembering that the Bank has a mandate to keep inflation at or around 2%, and in ordinary course of events, interest rates would have risen substantially to head off this threat. But these are far from ordinary conditions.

One could construe Mr King's comments as being moderately hawkish. But actions speak louder than words. Hinting that interest rates will increase is one thing, actually raising them is another. With growth faltering once again, weak consumer confidence and a stagnating housing market, it would be brave call by the Bank to raise interest rates any time this year 

Bootle says no rate rise before 2013

Noted Economist Roger Bootle has an enviable track record of getting the big calls right. In his latest Quarterly review Link Bootle has predicted that UK base rates will not rise before 2013, citing a weak recovery and squeezed household incomes as two reasons why the Bank of England will be in rush to raise interest rates from the current historic low of 1%.

I tend to agree with Mr Bootle that the Bank of England would be unwise to increase Base Rates until the recovery is based on more secure footings, and unemployment has levelled off. The price increases in Oil, food and other raw materials will themselves dampen demand, and wage inflation remains benign.

However, it is unclear whether the Bank of England's credibility in keeping a lid on inflation can last out for another 18 months. With CPI running at almost twice the BoE target, the pressure for them to "do something" is mounting. My own suspicion is that the Base Rate will be held for this year, but will rise, albeit very gently, during 2012. It will, however, be some years before Base Rates return to "normal" levels.