Sky News business editor Michael Wilson

You won't need to be told, as consumers, that you are more pessimistic than ever, but as the interest rate setters at the Bank of England begin their monthly deliberations, don't expect an interest rate cut.

I'd love to be wrong. I hope I am, because I, like everyone else, prefers low interest rates.

The chorus of woe from the economy would normally mean an interest cut was a no-brainer.

The Nationwide noting that high street confidence is slipping for the seventh month in a row; the growth in the service sector,which includes everything from restaurants to finance companies, is at a standstill and house prices continuing to fall - all would normally signal the need for cheaper money.

Add to that the evidence that employers are being forced to borrow more and run down their deposits in order to stay afloat, and the case for a cut looks copper-bottomed.

However, there's a view, which I share, that the increasing inflationary pressures, particularly from the ever rising oil price will stay the Bank's hand.

The consumer inflation measure was 2.5% in March, and looks set to stay like that until the autumn. (And of course we all now know that the rate of price rises in household budgets are far higher).

Manufacturers are also now passing their costs on to their customers, and the rising cost of feed and food has taken everyone by surprise.

So, unlike its US counterpart which has cut lending costs aggressively, the bank will maintain a cautious stance, and hold for now, but with every expectation that the base rate will be down to 4% by the end of the year. But as I said, I hope I'm wrong.

Updated May 09, 2008

So, as predicted it looks as though the Bank of England's monetary policy committee didn't think that inflationary pressures were yet relaxed enough to allow it to move.

We clearly won't see a rapid return to cheaper money, but June now looks like a good bet for another cut.

Hopes of anything else through the rest of the year will rise or fall on the inflation figures, and how far rising prices are slowing the public's willingness to shop, above all.

If the Bank's glidepath to a 'soft landing' for the economy remains smooth, a rough straw poll of City opinion suggests we could be looking at a base rate of 4% by the end of the year.

How far that is passed onto mortgage costs will be critical for the housing market. Difficult to say, right now

Comments

[Khalid 8 May 2008 10:34:54]

Sir
Insofar as economic prudence, and the chatter that has been ongoing for the past decade, it is plaudable a fact that the BoE has long last got its independence and more able to ensure inflationary control.
However, as a nation we have a long way to go before consumers are given the desired protection let alone breathing space in order to allow these fistful of monetary policies to bear fruit.
Month in month out the Boe reduces the base rate which from last figures viewed has only been passed on by a meagre 18 banks & building societies.
What the BoE must do is to maintain its stance thus far as interest in the financial market and impose upon all UK banks that unless they themselves pass on 75% of the rate adjustment, LIBOR penalties shall apply to all Banks and further restrictions imposed.
When the nation has safely sailed away from turbulant times, naturally we can re-visit the situation. So [Hands Up] you greedy banks and pass on 75% off all rate cuts in the past 6 months to your consumers otherwise the FSA will be transformed into [Boney M]!

[michael wilson 7 May 2008 19:46:51]

actually, michael, that's a good point. it is, of course,inconceivable here - the tax take just rises..and will continue to do so. the state is still on course for more borrowing, and there's no steering it away from that. it will be interesting to see if there's a spend effect in the US..remember Reagonomics which cut taxes in the hope that increased prosperity would 'trickle down'..that rebate is a sort of reverse, isn;t it ? hope the weather's good for you.

[Michael Cornwall 7 May 2008 13:32:23]

I don't think that the rate right now is so important as communicating a positive message.Having said that, I keep thinking about the blog a week ago about the Americans giving £300 tax rebate assuming people will spend it and the spend will circulate. The Americans do seem to have had a right go at the same problem