The decorations are up, the drinks are being poured and the guests are on their way. The only question is: do the hosts think that it’s time to get the party started, or do they want to wait until the new year? This is the state of affairs at the Bank of England today.

The nine members of the Bank’s Monetary Policy Committee (MPC) who will gather this week for their monthly rate-setting deliberations, have made it as plain as they ever do that they will be cutting interest rates fairly soon. November’s Inflation Report indicated that two quarter-point cuts would be needed by the summer to ensure that the economy grows strongly enough to keep inflation on track to hit its 2 per cent target. But whether these cuts should come immediately, or can be deferred a little longer is open to debate. Here is The Times’s monthly round-up of the issues facing the MPC.

Costs and prices: too strong
Headline consumer price inflation picked up to 2.1 per cent in October from 1.8 per cent the month before, having subsided from 3.1 per cent in March. But this modest rise against the target will cause little concern.

Instead, the committee will be fretting over a series of threats to the medium-term inflation outlook, magnified by the soaring cost of oil, which this month came within a few cents of $100 a barrel, before subsiding to less than $90 by the end of last week.

A key worry will be inflationary pressures in the pipeline, with prices for goods leaving Britain’s factories rising at a 3.8 per cent annual rate in October, the fastest for 12 years, thanks to steep jumps in fuel and food costs.

With a marked slide in the pound boosting retailers’ import costs, while dearer fuel lifts transport and heating bills, the MPC fears that retailers will pass on higher costs, stoking inflation.

That worry will be greater after a CBI survey showed retailers reporting the greatest price pressure since mid1998.

However, the MPC must weigh conflicting pressures from falling asset prices, which threaten to dampen demand and quell inflation.

Nationwide, the building society, says that house prices fell last month by 0.8 per cent, in the steepest fall for 12 years, while expectations of more bad news have been reinforced by weak mortgage lending. Nationwide now expects that house prices will be flat next year.

The stock market was sharply lower last month, too, with the FTSE 100

index down 4.3 per cent in its worst monthly drop since May 2006.

News on pay is mixed. Earnings growth, at 4.1 per cent, is well below the Bank’s 4.5 per cent “comfort threshold”, but has still climbed to a seven-month high.

Growth and output: at risk
Growth was still robust in the third quarter (Q3), although not quite as strong as previously believed, with the estimated rate revised down to 0.7 per cent, from an initial 0.8 per cent estimate. Consumer spending grew by a healthy 1 per cent over the quarter, but disappointing foreign trade knocked

0.5 points off growth. It is doubtful, though, that the economy can continue to steam ahead for much longer.

In October, retail sales fell for the first time in six months as consumers grappled with subdued income growth, higher mortgage bills and dearer food and fuel. Consumer confidence slumped last month to its lowest for nearly five years. Business investment, which was flat in Q3 and has disappointed all year, is another concern.

The international economy
Concern that the credit squeeze will persist well into next year, and grow

more severe, and ever worse news on the US housing slump are fuelling fears of American recession, with economists saying that US growth is liable to stall in the final quarter. The eurozone’s recovery also appears to be faltering, not least in the face of the toll from the euro’s rise to record levels, driven by the tumbling dollar.

Rate verdict: A likely hold. MPC doves will press hard for a cut and economists see the stakes as high, with the decision likely to be a close-run thing. Yet the nagging inflation worries of most of the MPC point to no change after a hard-fought debate.

Team talk

The MPC has been in a talkative mood this month.

Mervyn King, the Governor, sounded hawkish at the Commons Treasury Committee last week as he forecast that inflation was set to rise in the near-term. “There is certainly a risk that the MPC will not be able to keep inflation close to the target in the wake of these further increases in commodity and energy prices,” he said. “We are trying to balance the risks to inflation with the downside risk if activity slows sharply.”

Rachel Lomax, a deputy governor, and Charlie Bean, chief economist, also sounded reluctant to cut rates in a hurry, highlighting large uncertainties over the outlook. Ms Lomax emphasised that “there are always risks in signalling that policy will be eased at a time of rising energy prices”. She also noted that ahead of “the big season for pay awards”, the popular Retail Price Index gauge of inflation “hasn’t fallen in the way we would expect”.

Mr Bean sounded a warning that “the backdrop to our attempts to keep inflation in line with target is less favourable than it has been. . .” He added that this “may mean we have to run a tighter monetary policy for a while”.

Sir John Gieve, deputy governor, above, who voted to cut rates last month, argued that there was still a worry that “we have not yet seen the bottom” in present market upheavals.

David Blanchflower, who also voted for a rate cut, said that monetary policy was now restrictive and worried that the housing market could cut consumption.

Andrew Sentance burnished his hawkish credentials with a warning over an oil and commodities price shock.

Explore Economics

• Pre-Budget Report 2008

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