During an address to the London Chamber of Commerce and Industry on Thursday, Sir John Gieve, deputy governor, said that the Bank of England (BoE) has a difficult and delicate decision to make regarding an interest rate cut next month. While cutting the rate would boost consumer spending and the economy in general, holding the rate would help stave off inflation, which is becoming more and more of a concern for the UK. He said that their decision is far from clear at this point.
Sir John is responsible for overseeing the UK's financial stability, so this decision weighs heavily on his shoulders as a wrong decision could set the economy completely off balance. He said that "In reaching our decisions, the [monetary policy committee] always looks not just at the central projection for the economy but at the risks on either side. That will require not just difficult judgments but careful explanation in the months ahead."
After Sir John's address, sterling rose and interest rate futures decreased due to the inference that the chance of a rate cut next month is diminishing. The decision is being made more and more difficult by ever rising inflationary pressures resulting from increasing food and energy costs. If the rising prices were due to demand from within the UK, the monetary policy committee would be able to influence any further increases, but the demand is coming from abroad, so it is out of their jurisdiction.
Another key factor in the BoE rate decision next month is how people will react after the initial price shock concerning increasing food and energy costs wears off. Sir John said that people will be more likely to demand increased compensation to cover their increasing costs of living with higher prices, and there will be increased fear of inflation. All reactions need to be taken into consideration by the BoE as they decide what to do.
On a larger scale, lenders are going to be taking an even closer look at the risks associated with lending in this volatile economy. Even after the last rate cut, lending costs still increased and credit availability decreased because lenders were becoming warier. Sir John said that the first effects of credit withdrawal were seen in the commercial property market and in house prices.
Sir John's speech indicates that the credit crisis is nowhere near over and that the UK is still in serious economic danger. He said, "It is too early to declare the problem solved." He then added, "There are grounds for hope that we are reaching the end of the beginning."