Oil Prices Make Base Rate Cut Impossible

The Bank of England started the current round of base rate rises in August 2006, before which the rate had stood at 4.5%. Quarter point rises in August, November last year, and January, May and July of this took the base rate to 5.75%. Then came the US sub-prime crisis, the run on the Northern Rock and all of a sudden base rate rises were forgotten. With inflation also dipping below the 2% target, and consumer confidence turning downwards, the talk in late summer and early autumn was of possible rate cuts.

Then oil prices started soaring, and last week British households were advised to forget about a base rate cut until spring 2008. Oil Prices reached a record $96 a barrel, and the Confederation of British Industry (CBI) warned that the price surge would add a quarter point to the consumer price index, taking it over target. The CBI forecast that inflation would reach 2.1% for October, and stay around that level, making it impossible for the Bank of England to bring the rate down again as long as that situation lasted.

Inflation is always the priority for the Bank of England, and policy makers Kate Barker and Charlie Bean have re-affirmed that in recent weeks. The Monetary Policy Committee meets this week and the popular view of economists is that the base rate will be held at 5.75%.

Oil prices are forecast to hit $100 before long, and with higher energy costs forcing up utility bills and prices in shops, it is unlikely that households will be full of spending power to bring Christmas cheer to the economy this year. Consumer activity in October was at its lowest since November last year.

John Longworth, executive director at Asda, said: “Retailers’ hopes have been disappointed for the past few months, and they anticipate only subdued growth in the important run-up to Christmas.