Saturday, 8 January 2011
The old oil price excuse
Rising oil prices is every central banker's favourite "the dog ate my homework" excuse. Oil prices appear to be a strong upward trajectory. Prices have doubled since early 2009. The monetary policy committee will make heavy use of that fact this week when it meets to decide the bank rate.
The monetary policy committee is in a tight spot. The CPI inflation rate is likely to exceed four percent by February. Inflationary pressures are not just concentrated in the energy sector. November inflation data pointed to strong upward pressure for a whole range of items, including food, furniture and clothing.
But don't expect an early rate rise. The Bank of England is still fretting about a weak UK financial sector. UK banks have large amounts of debt maturing this year which they need to roll over. Low interest rates will reduce their funding costs. It would also help curtail mortgage arrears, and prevent a further weakening of bank balance sheets.
The monetary policy committee have a stark choice - should they tackle inflation or will they keep commercial bank funding costs low.
I think we all know how that decision will go. Rising oil prices will provide the necessary cover for keeping the bank rate fixed. The MPC will argue that they are powerless in the face of an unexpected energy price shock. Therefore, it is best to do nothing.