Thursday, December 13, 2007

UK inflationary expectations increase

The Bank of England's decision to cut rates is beginning to look like utter folly. Last week, output prices hit a 16 year high. Now, the latest inflation expectations survey reaches an eight year high.

The Bank of England has abandoned any pretense at maintaining stable prices. The objective now is to protect the banks and stabilize housing prices.

Dec. 13 (Bloomberg) -- Britons' inflation expectations rose to the highest in at least eight years in a Bank of England survey last month, making it harder for the central bank to lower interest rates further after the first cut since 2005.

Consumers predict prices will increase 3 percent in the next 12 months, the highest median forecast since the report started in 1999, the central bank said today in London. The quarterly survey, conducted by GfK NOP Ltd., included responses from 2,054 people interviewed from Nov. 15 to Nov. 20.

Policy makers, who aim to keep inflation at 2 percent, said last month they are watching expectations because oil prices close to $100 a barrel and rising food costs may prompt workers to demand higher pay. The U.K. central bank lowered the benchmark interest rate on Dec. 6, citing concern about slower economic expansion next year.

The inflation rate rose to 2.1 percent in October, the highest in four months. Oil prices rose to a record $99.29 on Nov. 21, pushing up the cost of gasoline and other fuels.

Current Inflation

Respondents in the survey said the current rate of inflation was 3.2 percent, the highest median reading since the survey was first conducted. Annual price gains at that pace would legally require the governor of the central bank to write an open letter of explanation to the Treasury. That has only happened once, in April this year.

Faster price gains may prompt workers to bid up their pay. Still, core inflation, which strips out food, energy, tobacco and alcohol, matched an 11-month low in October, and wage growth slowed in the three months through October, according to government statistics.

Slumping Satisfaction

A net 31 percent of respondents said they were satisfied that the Bank of England is ``doing its job to set interest rates to control inflation,'' the lowest reading since May 2000. The survey was the first the bank has conducted since it opened an emergency line of credit to Northern Rock Plc in September, leading to a run on the mortgage lender.

A jump in money-market lending rates following the collapse of the U.S. subprime mortgage market is helping cool economic growth and keep inflation under control, the bank said Nov. 14. It also predicted economic growth will be about 2 percent next year, down from around 3 percent in 2007. The bank cut the benchmark rate by a quarter point to 5.5 percent last week.

Higher interest rates are already hurting the housing market following a decade-long boom in which property values tripled. U.K. real-estate agents and surveyors became the most pessimistic about house prices since at least 1998 last month, the Royal Institution of Chartered Surveyors said in a separate report today.