If rates go up, you read it here first

Jan 21 2010 by Peter Jackson, The Journal

NINE months ago I remarked that gold was over US$900 an ounce and that some mavericks were even predicting the price reaching US$1,500.

They justified this by arguing that the stimulus packages on both sides of the Atlantic would fuel inflation, driving gold up.

Well, at the time of writing, gold stands at US$1,133 an ounce and the UK rate of inflation has risen to 2.9%.

This is the first time since May last year it has risen above the Bank of England’s 2% target. It represents a jump of 1%, the biggest since records began in 1997.

There is a case for saying that this is not as significant as it appears. In December 2008 there was a near record fall in oil prices, a VAT cut to 15% and heavy retail discounting; and the reverse of all these transient factors was bound to result in a hike in the annual inflation rate.

So, it is further argued, those who now predict that the Bank of England’s Monetary Policy Committee (MPC) will have to consider raising interest rates from their historic low of 0.5% are mistaken.

Even if inflation temporarily breaches the 3% barrier, forcing Mervyn King to write an explanatory letter to Alistair Darling, underlying deflationary pressures will bring the rates back down without the aid of the MPC making money dearer.

The problem with that rosy view is that the 2.9% rate is significantly worse than economists were predicting.

Furthermore, the foreign exchange markets don’t seem to buy it, as sterling has risen to a four-month high against the euro on the back of expectations of an interest rate rise.

Nobody doubts interest rates will have to rise eventually; the interesting question is when. Not, I suspect – if Gordon Brown has anything to do with it – during a General Election campaign.

But can he have anything to do with it? As I pointed out some 18 months ago, under the terms of the 1998 Bank of England Act which gave the Bank to power to set rates, in extreme circumstances, if the national interest demands it, the Government can instruct the Bank on interest rates for a limited period.

I’m not saying Gordon will, but, if he does, remember, you read it here first.

:: Peter Jackson is a freelance journalist and former Journal business editor p.jackson77@btinternet.com