Investment Management Blog - Montague Capital

The last-minute statistics coming up for scrutiny by the Monetary Policy Committee in its interest rate-setting meeting yesterday do not simplify its task.  Figures from the British Retail Consortium suggest that shop price inflation has fallen slightly in the last month to 1.1%.  The BRC says its members are nobly responding to customers’ desire for better value.  Quite.  The inference is that we don’t need to worry about inflation.  Well, actually we do.  Speculation about today’s likely rate cut and all further cuts that “have to” follow in order to protect UK economic growth sent Sterling to an all-time low against the Euro on Wednesday, which hardly helps to contain rising prices of imported goods.  Fortunately oil is still priced in dollars and not Euros, for its price rose to within a new all-time record high of US$112.10/bbl.  This was despite the IMF’s warning that the US is now definitely heading for recession, which ought to reduce the overall demand for oil and make the market less sensitive to tiny discrepancies between forecast and actual stocks of the sort that caused Wednesday’s price spike.  Meanwhile, statistics from UK manufacturing industry do not suggest that it is in recession, yet.  Manufacturing output for February rose at an annual rate of 1.9%, the highest rate for fourteen months.  So need we not bother about growth either?  Again, we ought to, because series like this do lag what is happening in the real world.  Today manufacturers are likely to be feeling less optimistic and doing less well than when data for this survey was being assembled.  Lastly, a nasty new thought needs to be added to the mix.  Work by property research group UKValuation reminds us of the strong probability that borrowers may have more than one loan secured on their property.  Where was the harm in taking on all these extra loans when money was plentiful and cheap and house prices went up for ever?  After all, it was essential that we had that new car/holiday home/extension today rather than wait to earn the money to pay for them.  It’s not very heartening to think that, even now, banks may not know the true effective loan-to-value ratios on the houses to which they have an exposure. This does nothing to reduce the possibility of default.  It’s ironic that the MPC was powerless to act effectively to halt the bubble in house prices and associated lending that got us into the present mess, yet it is now being bullied to act promptly to deal with the aftermath.  Who’d be a central banker?