By Natalie R. – U.K. inflation exceeded the government’s 3% limit for a seventh month in September according to a CPI report released today. The rate is well above the 2% goal set by the Bank of England, adding to the debate over the future of the monetary policy as the country is attempting to recover from the recession.
The Central Bank has been debating expanding its 200 billion-pound ($318 billion) stimulus plan to stimulate growth as the government is expected to begin the drastic spending cuts in order to tackle the country’s enormous debt. The concern is that such drastic cuts will suppress consumer spending and therefore cause a double dip. Adding to this concern was the release of a highly disappointing Halifax HPI last Thursday, which showed that housing prices fell to a record low. However, with inflation already above comfortable levels, sanctioning more quantitative easing, namely pumping more money in to the economy, may prove difficult. Expanding the monetary easing programs will ultimately result in even higher inflation.
There is currently a split in the BOE regarding the future course of action. Bank of England officials are split over whether to raise interest rates to curb inflation or add stimulus to avert the threat of another slump. It seems unlikely, however, that any hikes in the interest rates will occur short term. With economic fundamentals in the U.K proving to be relatively weak, raising interest rates, and thus limiting liquidity in the markets will stifle consumer spending and ultimately the economic recovery. Consumer spending accounts for the bulk of the country’s economic activity.
This debate is particularly interesting ahead of Friday’s Inflation Report Hearing where the BOE Governor and several MPC members testify on inflation and the economic outlook before Parliament’s Treasury Committee. With the necessity of spending cuts on the one hand, and uncomfortable levels of inflation on the other, it will be interesting to see how the BOE will decide to act. In any case, an exciting trading week is expected for the Pound.
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