Bank of England’s Rate Raising Cycle Is Far From Over!

By: Mario_Innecco

Today we saw the O.N.S. (Office of National Statistics) release the C.P.I. and the R.P.I. for the month of June. The C.P.I. or the consumer price index came out at a 2.4% year on year rate and actually dropped from 2.5% in May but the financial markets were expecting a drop to 2.3%, while the R.P.I. or the retail price index came out at 4.4% year on year which was on the back of an expected decrease from 4.3% to 4.2%.

Short sterling futures, which reflect expectations of three month deposits, dropped across the board. A one basis point decrease in the futures price represents a one basis point increase in expectation of three month sterling deposits. The September 2008 futures dropped from 93.68 to 93.61 and is therefore discounting a rate of 6.39% for September of next year.

Tonight's Evening Standard's front page story says: “Soaring prices in shops mean rates are certain to hit 6% soon” and it goes on to say that economists now think another rate hike by the Bank of England is almost certain and that it could come in August. We have noticed that most economist have been underestimating how far the Bank of England will need to raise rates.

In an article in March this year Victoria Marklew, an economist at The Northern Trust Co., said the following: ”

So, where does all this lead interest rates? The prospect of one more rate hike in April or May has dimmed a little but not disappeared. In its February Inflation Report the BoE concluded that inflation would be slightly above the 2.0% target in two years time if the repo rate stayed at 5.25%. And while the MPC seems to be feeling more sanguine - even the two most hawkish members voted to stay on hold this month - they are not yet ready to rule out the need for additional tightening.” Another article in the FT on the 4th of June carried the following quote from Robert Lynch at HSBC: “UK interest rates are seen staying at 5.5 per cent, even though inflation concerns remain prominent following recent data pointing to the increased pricing power of British companies. Interest rate futures suggest another quarter-point increase to 5.75 per cent is likely by August.” We are now in July and the BoE has already raised rates (June) to 5.75% and 6% is expected in August!

We at ForSoundMoney think it is very important to follow money supply growth as inflation is the growth of the money supply which leads to rising prices of goods and services. In the U.K. the broadest measure of inflation or the money supply is the M4. We have warned our readers in the past that it is imperative that the Bank of England do whatever is necessary to keep money supply growth under control. We think the Bank of England has lost control of inflation and that the only way it can bring it back under control is through much higher interest rates than we have got at present (5.75% BoE rate). Check out the chart below and notice how the last time the M4 growth rate was hovering around 14%, like it is now, how the 10 year Gilt yield was around 10% and the R.P.I. was also at 10%.

By Mario Innecco
ForSoundMoney.com

At ForSoundMoney we stand for a hard currency. We believe in a monetary system based on commodity money and a free-market banking system where central banks are non-existant.

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