How China affects UK interest rates
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We’re China bores here at MoneyWeek and we make no apology for it. Almost every story we write every week, whether we mention it explicitly or not, somehow refers to China.
There’s our cover story on the Canadian oil sands, for example. They’d still be languishing happily under the pristine forests of Alberta if it wasn’t for Chinese demand pushing up the price of oil and all of a sudden making the sands look economically viable.
Then there’s our story on investing in Taiwan, a market we’d have dismissed as having nothing to offer but commodity technology component makers were it not for the fact that it shares a common language with the world’s fastest growing economy. Better still, where the Taiwan Strait is at its narrowest, the country is a mere 100km away from it too.
Next, look at the worrying increase in the size of the UK trade deficit. That’s partly down to the high price of oil (again thanks to China) and partly down to the fact that we just can’t seem to resist buying cheap stuff from Chinese factories.
And finally there are the inflation numbers. The CPI fell slightly in January to 1.9% – just under the Bank of England’s 2% target. And guess what we have to thank for that. Yes, it’s China. The main thing pushing Gordon Brown’s favoured measure of inflation down was not a sudden fall in our overall cost of living (that, I’m afraid, is long going to remain a distant dream), but a fall in the prices of furniture and household goods (down 0.8%) and a fall in the cost of clothing (down a huge 4.7%, something that is only possible without the entire high street going bust because of China’s huge low-cost manufacturing capacity).
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So what does this mean for interest rates? Will we find that, thanks to the China factor, at the next meeting of the Bank of England’s Monetary Policy Committee rates will suddenly fall – as so many commentators seem to think?
We doubt it. For starters, there is no doubt that there is still inflation in the system. As MoneyMorning’s John Stepek (www.moneymorning.com) points out, while the CPI may have fallen, the bank’s old target measure of inflation – retail price inflation excluding mortgage interest payments (RPIX) – which is less heavily weighted to all the stuff that is falling in price, actually rose sharply (from 2% to 2.3%) in January. Just as worryingly, so did factory gate inflation.
It’s also worth noting, says Stepek, that although we hadn’t yet seen them, the bank had these figures to hand at its February rate-setting meeting and the Monetary Policy Committee didn’t vote for a cut then. So why should they now?
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