At home, the minutes of the March meeting of the MPC showed that the committee had unexpectedly voted 8 to 1 in favour of leaving base rates unchanged.
This flies in the face of the economist community, which had been evenly split between those expecting a rise at that meeting and those who thought the decision might be deferred until May. The overwhelming vote in favour of the status quo speaks loudly that the MPC is paying more heed to inflation, which has fallen to a mere 1.1%, than it is the ongoing rise in house prices. This was never going to be an easy dilemma to resolve, but it appears that the prospect of writing a letter to the Chancellor to explain why inflation is too low is more terrifying than an overheating housing market.
In the US, Alan Greenspan has been making one of his regular updates on the state of the world. He has successfully completed his usual trick of convincing observers of his brilliance by speaking sagely about very little in reality. However, the interpretation of the latest thoughts is that the US economy is still strong and that an alleviation of deflationary pressures ought to mean that interest rates will rise before the end of the year. Although it could be argued that almost any increase in rates from the current level of 1% will have almost no affect on the economy (even a doubling to 2% is hardly Armageddon), markets duly responded to their oracle. Bond prices weakened, as did equities, while the dollar firmed and is looking increasingly as if it has turned around in the short term, especially against the euro.
The majority of company news this week has also been in America, where the first quarter reporting season is in full swing. Results have been exceptionally good; with almost 40% of the constituents of the S&P 500 Index having reported, an extraordinary three-quarters of these have beaten expectations. It would be normal to assume that equity markets would be surging on this news, but the combination of Greenspan’s hints on interest rates and a slightly odd reluctance of many companies to express confidence about prospects for the remainder of the year is keeping a tight lid on things.
Domestically, the possible demise of high street stalwart WH Smith has been the focus of attention. It has confirmed that it is in early stage bid discussions with the private equity firm Permira, which has tabled an indicative bid of 375p per share. The apparent generosity of this relative to last week’s lowly price of 245p needs to be seen in the context of the 400p at which the shares were trading as recently as last October. There is no denying that this is a welcome straw for long-suffering share holders, but credit must also be given to Permira’s skilful timing.
