Bank on MPC to hold its fire

THE Bank of England's monetary policy committee kicks off its last meeting before the general election today. When rate decisions were in the hands of politicians, a pre-election rise would be unthinkable. But that is precisely what the MPC must consider. Having said that, an increase would be a shock given the recent run of weak data. JANE PADGHAM weighs up the evidence the MPC will scrutinise before delivering its verdict at midday tomorrow.

House prices

NOT for the first time, the two main reports on the housing market in March contradicted each other. Nationwide said prices dropped 0.6% - the largest one-month decline since June 1995 - following a 0.5% rise in February. Mortgage rival Halifax reckoned prices rose 0.5%, offsetting February's 0.5% fall. The weight of evidence suggests that, after slowing in the second half of last year, the market is stabilising.

High Street spending

Gloom in the struggling retail sector is deepening. Hit by the cold snap and consumers' waning confidence, retailers said sales in March were the worst for 13 years, according to the CBI. Early indications point to a disappointing Easter on the High Street. Analysts are split on the outlook for consumer spending. Some say the misery will continue but others believe record employment and bargains galore will help it rebound.

Manufacturing

Despite avoiding a widely predicted recession last year, manufacturing is still having a tough time. Latest surveys show firms struggling to fill order books and margins being squeezed by soaring energy costs. The CBI said factories are scaling back output expectations in the face of subdued demand. The Chartered Institute of Purchasing and Supply said the strong pound and weak eurozone demand led to falling export orders in March.

Inflation

Inflation stuck fast at 1.6% for the third month in a row in February, below the Bank's 2% target. The Office for National Statistics said airline tickets and utility bills went up but these were offset by cheaper furniture and household goods. The recent stability has helped calm worries in the City that price pressures are building but the Bank continues to believe inflation will overshoot its target in two years' time.

Labour market

Gordon Brown's jubilation over 30-year low levels of unemployment on Budget Day was overshadowed by news that a million manufacturing jobs have been lost under Labour. More importantly for the MPC, the ever-tightening labour market does not appear to be sparking wage inflation. Average earnings growth in the three months to January was steady at 4.4%.

International economy

The uncertain global outlook continues to cast a shadow over Britain's economy. The US is enjoying robust growth but inflation is creeping higher, sparking concerns that Federal Reserve chairman Alan Greenspan will soon raise interest rates more aggressively. The key non-farm payrolls report showed only 110,000 American jobs were added in March, half the number expected. The eurozone remains sluggish and disappointing.

Oil prices

World oil prices have surged to record highs above $58 a barrel over the past month. So far, the MPC has been reasonably relaxed about soaring oil. It said at last month's meeting that oil prices might remain at higher levels than previously thought but noted that the relatively high rates of fuel duty would limit the impact on inflation. It added that higher prices would also slow global growth a little.

MPC comments

The minutes of March's meeting revealed that Sir Andrew Large joined Paul Tucker in voting for an immediate quarter-point rate rise. Of the other seven members, some continued to think that a rise 'might be warranted in due course'. Bank Governor Mervyn King told MPs on the Treasury Select Committee the scale of the retail sales slowdown was 'likely to prove temporary'.

Verdict

While the MPC has continued to hint rates are heading higher, the economic news over the past month has been surprisingly weak. Tomorrow's decision should be fairly straightforward - concerns that consumers are reining in their spending while manufacturing continues to struggle will see rates left on hold at 4.75% for an eighth month. The City still expects the MPC to pull the rates trigger later this year but another rise is by no means a certainty.