Interest rate dilemma for BoE committee

Rate-setters at the Bank of England were given plenty to ponder today after figures on house prices and manufacturing output in the UK confounded expectations.

While experts are certain the Bank’s Monetary Policy Committee (MPC) will keep interest rates at 4.75% tomorrow, the data has muddied the economic waters, with house prices back on the rise but industrial activity firmly in reverse gear.

Economists said the latest factory output figures – showing the sharpest monthly drop for two years – could contribute to rates remaining on hold for the rest of the year as forecasts on third- quarter GDP are scaled back.

Soaring raw material costs – fuelled by sky-high oil prices – weak demand from overseas and higher borrowing costs were blamed for today’s disappointment, which comes after positive signs on the sector earlier in the year.

Paul Dales, of Capital Economics, added: “The Bank of England’s strategy of raising interest rates to take the steam out of the housing market is in danger of leaving the economy with much less forward momentum.”

The view of MPC members on the housing market will also be harder to call after the Halifax announced a surprise 1.4% rise in property prices for September.

That followed a 0.5% drop in August after five rate rises since November appeared to have taken their toll on confidence.

The Halifax said the overall trend was still for an easing in house price inflation, adding that London and the South East had provided the driving force for today’s increase – leaving the North-South divide at its narrowest for six years.

With the MPC still likely to believe household spending is under control, HSBC economist John Butler said rates would remain at 4.75% this month and next.

He added: “Although it is too early to call this the peak in the rate cycle, the data does need to start improving, and improving soon.”

The MPC last increased the cost of borrowing in August but since then its own research has suggested the long-term target for inflation of 2% could be met without the need for further aggressive hikes in rates.

And expectations of lower third-quarter GDP figures – following today’s manufacturing output figures – will increase those chances. Most economists now expect GDP to only be at trend, with growth of around 0.6%.

David Kern, economic adviser to the British Chambers of Commerce, said: “There are very worrying signs that the manufacturing recovery is facing growing obstacles and is slowing prematurely. Indeed, the risk of renewed recession in manufacturing cannot be ruled out.”