What's in store for 2004?

THE Bank of England's monetary policy committee (MPC) kicks off its first meeting of 2004 tomorrow with tales of a miserable Christmas for retailers ringing in its ears.

The grim reports have triggered hopes that the MPC will leave interest rates unchanged at 3.75% this week, although a rise in the cost of borrowing within the next few months is seen as inevitable.

Bank Deputy Governor Sir Andrew Large has already voted for a quarter-point increase, at December's meeting.

Jane Padgham takes a look at what will be on the MPC's agenda before it delivers its verdict at midday on Thursday.

High Street spending

Festive spirit was in short supply on the High Street over the Christmas period. With consumer confidence knocked by November's rise in interest rates - the first increase in nearly four years - retailers were forced into heavy, early discounting to shift stock.

Retail consultancy Verdict has predicted that the tough times will continue into 2004 as consumers rein in their spending when credit card bills arrive.

Consumer debt

Debt has become an increasingly heavy millstone round consumers' necks, although there are tentative signs that the Bank's warnings about people overstretching themselves may finally be starting to sink in.

Latest official figures showed mortgage lending rose by £8.6bn in November against £9.5bn in October in the wake of November's quarter-point increase in the cost of borrowing. The slowdown came after mortgage equity withdrawal surged to a record £13.4bn in the third quarter of last year.

Housing market

Homeowners enjoyed more hefty gains in the value of their properties in 2003, with house price inflation ending the year at 15.6%, according to lending giant Nationwide.

However, 2004 is expected to be less lucrative, with higher interest rates sparking a market slowdown.

Nationwide has pencilled in house price inflation of 9% in 2004, while mortgage rival Halifax is predicting 8%. Most analysts are confident that a property crash has been avoided.

Growth

Chancellor Gordon Brown was handed an early Christmas present when the Office for National Statistics upgraded its GDP growth estimates for the second month in a row.

It now believes Britain's economy expanded by 0.8% in the third quarter against a prior 0.7% estimate, meaning the Chancellor's 2% growth prediction for 2003 is almost certainly in the bag.

Faster growth is expected this year, with both manufacturing and the large services sector poised to benefit.

Inflation

The MPC has a new target to hit and a new measure to grapple with after Gordon Brown shifted the goalposts in his Pre-Budget Report.

Both Bank Governor Mervyn King and the Treasury insist that the new 2% target on the Consumer Prices Index will not make much difference to interest rates, but many City economists believe the change is equivalent to a tacit loosening of policy.

CPI is currently only 1.3% and has been below 2% for more than five years.

Sterling

In the past month the pound has gained eight cents against the dollar as the greenback's sharp slide has driven sterling to 11-year highs above $1.80.

Thankfully, the dollar's tumble has coincided with a pick-up in the US economy, meaning Britain's exporters have not suffered reduced competitiveness. They have also benefited from lower production costs, as many raw materials are priced in dollars. Against the euro, sterling has been steady at about 70p to the single currency.

Global economy and stock markets

The long-heralded global economic recovery has finally taken root, propelling stock markets around the world higher.

London's FTSE 100 index of leading shares ended 2003 with a 10-day winning streak - its longest uninterrupted rally in more than six years.

The Footsie scored a 13.6% gain on the year - its first annual rise since 1999 - as it bounced back from the worst bear market for stocks in a generation.

Verdict

Disappointing Christmas sales and low inflation are expected to keep interest rates at 3.75% for the second month in a row this week.

However, the stay of execution is likely to be brief, and many in the City predict a quarter-point increase in the cost of borrowing next month to coincide with the Bank's February Inflation Report.

Faster growth and ongoing concerns about consumer debt will force the MPC to apply the brakes again later this year.