March 28, 2007 | posted by Michael Baxter in IABN |

For some time now, a further rise in the UK rate of interest has been widely predicted. But then, people have been saying, with all those one-off costs, such as the price of fuel falling out of the annual figures, inflation will fall, and the Bank of England will be able to lower rates.

Against that, there is the contrary view. We have remarked on several occasions this year, on how many of the stars of the high street in recent months have not been cost cutters. John Lewis and Marks and Spencer resolutely refused to join the rush to slash prices, and yet sales soared.

In manufacturing too, there have been signs that our producers are upping costs. Last week, we told how the CBI’s latest industrial trends survey reported its price expectation index hitting a 12-year high.

Yesterday, the Bank of England’s cast of gurus spoke.

Five members of the Bank of England Monetary Policy Committee, including both hawks and doves made their latest testimony to the Treasury Select Committee.

The top man, Mervyn King, commented on what he called: “a little more pricing power in the market,” while Kate Barker and the normally doveish Rachel Lomax said the economy is: “not far away from full capacity.”

These days, the jury is out on how important the money supply is, and our central bank seems divided. Of late, the UK’s money supply has been soaring, but does this matter? Ms Baker and Ms Lomax suggested they are sceptical about how a change in the money supply can lead to inflation, but the other three members were not so sure, with Mr King saying: “to ignore it as a potential medium-term influence could lead to tricky territory.”

Capital Economics has long been predicting a fall in the rate of interest in due course. But it seems to be moving its prediction backwards. For some time, it said the falls would occur this year, now it’s talking about rates falling early next year.

But, if the fears over the rising money supply prove to be right, and if the loss in the popularity of price discounted goods on the high street, and the trend seen among manufacturers to up prices proves to be a long term trend, then rates may not fall so fast.

Meanwhile, in the US, where consumer confidence belies some of the recent turmoil, the Cleveland Federal Reserve president Sandra Pianalto has said: “We still see risks to the inflation environment.” And from those words, we can interpret that the Fed’s capacity to lower rates if the predicted economic slowdown occurs might be limited

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