Thursday 8 July 2010

The Non Event - Bank of England holds the UK Bank Rate at 0.5% - July 2010 Update

Today’s announcement that the Bank of England had held interest rates at 0.5% for the 16th month in a row plus decided to do no more quantitative easing (QE) was so predictable and such a non event that I nearly didn’t bother posting. I did however discover some interesting data from the Office of National Statistics (ONS), which I’ll cover in a minute, which made a post worthwhile. Firstly let me get the data out of the way.

My first chart shows the Bank of England Official Bank Rate and alongside I also now track the Reserve Bank of Australia Cash Rate which was held at 4.5% for the 2nd month. It’s interesting that while they didn’t undertake anymore QE they also didn’t take any of the £200 or so billion back out of the economy either. I wonder if they ever will.

My second chart shows the Bank of England Official Bank Rate alongside inflation. The retail prices index (RPI) has fallen from 5.3% to 5.1% and the measure supposedly followed by the Bank of England, the consumer prices index (CPI), has fallen from 3.7% to 3.3%.

Now the interesting data. The Bank of England keep talking up the story of the coming inflation falls and one off effects in letters to the Chancellor. The ONS has however published some data advising the effect on inflation of Chancellor Osborne’s June 2010 budget. The good news (well if you are an indebted government or reckless indebted borrower) is that it will add 1.77% to the CPI and 1.67% to the RPI. This is built up out of many small effects which include tobacco, alcohol, road fuel, alcohol, air passenger duty, insurance premium tax and the one that makes the big difference value added tax. The timing effects of these changes are from 24 March 2010 to 4 January 2010. So if all these were added today we would have RPI at 6.8% and the CPI at 5.0%. That doesn’t sound like inflation falls to me. Of course I’m sure it will all be swept under the carpet as one off effects. There seem to have been many of these effects over the last few years.

It’s moments like this I’m quite happy that I have 21% of my net worth tied up in NS&I Index Linked Savings Certificates. The big VAT hit to inflation comes on the 4 January 2010 so I really hope another issue of these certificates are made available before then so I can further protect myself.

Of course as always do your own research.

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