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Grace Under Pressure


I am reliably informed that today is considered to be the unhappiest day of the year, but if you are feeling a bit blue then spare a thought for the Governor of the Bank of England who is now under intense pressure from two camps following last week’s decision to keep interest rates on hold.

On one side, as inflation continues to stick and looks set to top the 4% level, he is in danger of losing credibility if he is not seen to be controlling inflation and raising interest rates.

The Office for National Statistics has warned that rates could rise by June of this year after factory-gate inflation – the prices that manufacturers have to pay for raw materials – increased yet again due to higher commodity prices. Anyone who has recently done a “big shop” or filled their car up with petrol will know the feeling.

The City also seems to have priced in a rate rise by June as Gilt yields have increased.

On the other however, Bank of England governor Mervyn King and the other members of the Monetary Policy Committee, (MPC) are being urged to ignore these inflationary pressures after some leading economists and politicians warned that it could wreck the economic recovery if rates increase too soon.

The influential Ernst & Young Item Club and senior figures in the Con-Lib coalition have all expressed concern. Talking to the BBC Peter Spencer, chief economic adviser to the Item Club, said any rate rise now by the Bank of England would be a mistake.

“If the Bank has been pushed into a rate rise this year it will find itself with a depressed economy, a low rate of inflation below target, and of course having to cut interest rates… That would seriously damage its credibility.”

They still believe that the inflationary pressures are temporary and will come down towards the end of this year and into 2012, however the Bank face a massive test of nerve over the next few months.

As far as the consumer is concerned, the overall impact of all of this is that lenders have begun to increase their rates, especially on fixed rate products as the cost of these products begin to increase.

The next few months look as if they will be a key time for many people and businesses as different, sometimes conflicting, forces come into play. Maintaining grace under pressure and making calm, sensible decisions will undoubtedly make all the difference.

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