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25 July 2010

Expectation-beating GDP data surprised everyone on Friday and sparked much debate about whether interest rates are likely to go up in the months ahead. There is no doubt that the 1.1% growth in output in the three months to June exceeded everyone's expectations and it is likely the news will silence calls to pump more money into the economy. But it is unlikely to lead to a swift move to lift the Bank's interest rate from the current lows of 0.5% Read what the decision-makers have been saying recently and it is clear that one quarter of strong growth, even if it is far, far above expectations, will not be enough to cause the majority of the committee to rethink their assumptions about the prospects for growth or inflation. The men on the committee have faced down criticism about their decisions for many, many months and have merrily changed their interpretation of the 2% inflation target because they believe they have got it right regardless of what their critics say. The fact that inflation has been above target for 41 of the past 50 months and is currently around 2% higher than where the committee thought it would be at this point has left members unfazed. They - like others - are still holding to their belief that the pace of growth will slow in the months ahead. The chief economist for the Bank of England, Spencer Dale, said just this week that there are some signs that growth may be slowing again. He is worried about the amount of cash available to businesses and also nervous that weak sterling has not led to more exports. He is also nervous about how the simultaneous cutbacks across a number of the world's leading economies will affect growth. In an interview with the Independent, he said the economy will not be back to normal for an awfully long time. All that from the man thought to be the most likely to join Andrew Sentance and vote for an increase in rates. Others are even less likely to make such an important about-face so soon. Published by CityWire