The Bank's rate juggling act

THE BANK of England's Monetary Policy Committee kicks off its latest meeting tomorrow with alarm bells ringing over surging house prices and mounting consumer debt.

Reports that the property market is in the grip of a new boom and consumers' appetite for debt is as strong as ever suggest the monetary medicine administered in November and February is so far having little, if any, effect.

But the MPC, despite voting unanimously for higher interest rates last month, will be wary of turning the screw too far, too fast and triggering a consumer crash which could undermine the economy's recovery.

So what will be on the MPC's agenda before it delivers its verdict at midday on Thursday?

Housing market

PROPERTY prices continue to defy gravity. Latest figures from Nationwide show the average price of homes shot up by 3.1% in February, pushing the year-on-year rate of growth to 17.1%. The building society said recovery in the City had triggered renewed buying interest in London and the Home Counties.

While most experts continue to play down fears of an early-nineties-style crash, the higher prices rise, the greater the risk of an eventual collapse.

Consumer debt

CONSUMERS are still piling on debt despite higher interest rates and repeated warnings from the Bank about people overstretching themselves. Latest figures show consumer credit - borrowing on credit and store cards, loans and overdrafts - rose by £1.93bn in January, the biggest jump since last May and not far off the £2.1bn record increase seen two years ago.

Mortgage lending also picked up. Britain's debt mountain is fast approaching £1 trillion and is almost equal to the value of the entire economy.

High Street spending

A POST-Christmas shopping frenzy showed consumers are still splashing out on Britain's High Streets. Following a 0.9% rise in December, retail sales leapt by 0.6% in January. That took the year-on-year rate of increase to 6.4%, the fastest since December 2002.

Clothes shops and shoe shops did well, with sales rising by 2.3% in the month despite evidence that stores did not discount as much as usual in the January sales.

Growth

THE Office for National Statistics last week upgraded its GDP growth figures for last year. It now says Britain's economy expanded by 2.3% in 2003 rather than the 2.1% calculated in January.

That meant growth was slap-bang in the middle of the 2%-to-2.5% forecast range set out last year by the Chancellor, a prediction derided by economists as over-optimistic. The good news was tempered, however, by a breakdown of the figures showing the economy remains chronically unbalanced.

Inflation

PRICE pressures remain subdued despite the economic upswing. Inflation on the new consumer price index measure was just 1.4% in January and has been below the Government's 2% target for more than five years.

However, the Bank justified its recent rate increases on the grounds that inflation will pick up to target over the next two years as the economy's spare capacity is used up and import prices rise.

Sterling

THE pound has been on a rollercoaster over the past month, powering to an 11-year peak of $1.9140 before slipping back below $1.87. Nevertheless, it has gained 2% against the dollar and 2.5% against the euro since the MPC last met.

The gains should reduce the need for higher interest rates by bearing down on import prices. But some on the MPC believe sterling's rise should be viewed as having a one-off impact on inflation, which should be disregarded when setting monetary policy.

Global economy and stock markets

WHILE the global economic recovery has established a firmer footing, significant risks to the outlook have not gone away. In the US, GDP grew at a punchy 4.1% annual rate in the fourth quarter of last year but the ballooning budget and trade deficits threaten to derail the recovery.

In the eurozone, there are worries that the single currency's rise to record levels against the dollar are hitting European exports. However, stock markets continue to forge ahead, the FTSE-100 adding more than 100 points since the MPC last met.

Verdict

THE MPC's softly, softly approach to raising rates means the cost of borrowing is likely to remain on hold this week. However, the stay of execution is likely to be brief, and many in the City predict another rise in May to coincide with the Bank's next Inflation Report.

Some say more strong data over the next month could prompt a move in April.