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Surge in inflation could stop further interest rate cuts, says Ward

New Star chief economist Simon Ward says a recent surge in inflation could put paid to hopes of early further interest rate cuts.

He says that a “triple whammy” of bad news this morning suggests this risk may be crystallising.

Ward says that factory-gate prices jumped 1.4 per cent in April to stand 7.5 per cent higher than a year ago – the largest annual increase since 1985.

The “core” annual rise – excluding food, beverages, tobacco and petroleum products – was 4.6 per cent, a 13-year high.

Import prices surged a further 1.9 per cent in March, pushing their annual increase up to 10.3 per cent – approaching the peak of 13.7 per cent reached in 1993 following sterling’s expulsion from the ERM. With the effective exchange rate down by 2 per cent since March and world prices of imported commodities continuing to climb, a further rise is certain.

Ward says new projections in Wednesday’s Bank of England Inflation Report may show annual CPI inflation peaking at close to 4 per cent later this year and remaining at or above the 3.1 per cent letter-writing threshold for six months or more.

“While surging world commodity prices have been the key factor driving inflation higher, the impact has been magnified by a 13 per cent fall in the effective exchange rate from a peak last July – equivalent in magnitude to the 1967 devaluation, when Harold Wilson famously claimed “the pound in your pocket” would be unaffected. Many economists have cheered on this decline, arguing it was necessary to “rebalance” the economy away from consumer spending. In a speech in January, Mervyn King talked approvingly of a drop of almost 10 per cent in the effective rate by then, adding helpfully that “ financial markets are pricing in a significant probability of a further decline”.”

Ward adds: “With the broad money supply M4 having risen 22 per cent more than nominal GDP over the last three years, and the exchange rate sharply weaker, the surprise is that economists should be surprised by current inflationary problems.”


Nationwide slices rates on fixed deals

Nationwide is cutting some of its fixed-rate loans by up to 0.3 per cent from May 16, including two-year fixed, two-year fixed without fee and two-year remortgage.

Portal points

The reporting on the Bates’ conference in last week’s issue surprised me. Andrew’s presentation, which we thank him for and which was arguably the highlight of the week, was indeed critical in some areas of the way that Money Portal manages its regulatory businesses. However, the article was unbalanced and missed two very important points.


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