Rates kept down – but inflationary leap and collapse ahead!

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INTEREST rates were kept down at one per cent in the EU and at 0.5 per cent in the UK yesterday.

The European Central Bank (ECB) has kept eurozone interest rates on hold for the 15th month running, as the ECB continues to seek a way out of the slump and the EU governments’ debt crises.

ECB president Jean-Claude Trichet said that while uncertainty remained rates would remain at the current level, because everywhere governments are cutting back on public spending, weakening economic growth, and increasing unemployment.

In the UK the nine-strong Bank of England Monetary Policy Committee (MPC) was not moved by the UK economy’s reported 1.1 per cent advance between April and June, since growth is expected to collapse, and the slump resume, in the second half of 2010. This will be when the huge Budget cuts take hold. The backbreaker will take place when VAT moves up to 20 per cent in the New Year.

The VAT rise will push up inflation, causing steep price rises, at the same time as the slump deepens.

The BofE’s MPC has maintained its low interest rate policy stance it established when the crisis took hold, and also its £200bn monetary easement policy, as a last gasp effort to maintain the timid economic growth through the Autumn and into the New Year.

The consumer prices index (CPI) – the official measure of inflation remains above three per cent – while the RPI inflation rate index has been above 5.0 per cent for months.

The Bank is expected to announce an increase in both inflation rates when it publishes the August Inflation Report next week, while an inflation rate of eight per cent is expected in the New Year.

The fears that Britain’s recovery is coming to an end were reinforced by a snapshot of the UK services sector in July on Wednesday.

The Market/CIPS services purchasing managers’ index (PMI) – which measures activity in the sector – fell to 53.1 from 54.4 in June.

Economists had expected a slight improvement to 54.5, and the disappointing news for the economy helped to drive sterling down almost a cent lower against the dollar, to close at $1.5877.

At the same time new car sales have taken a dive.

New car registrations were 136,446 last month, down 13.2% from a year ago, the trade body said.

The Society of Motor Manufacturers and Traders (SMMT) verdict was that ‘Subdued consumer confidence and a still-fragile economic recovery make the outlook for the remainder of 2010 challenging, but a stronger-than-expected first half means full year volumes are still forecast to exceed 2009’s total.’

The SMMT added the outlook for the car industry in 2010 remained ‘difficult to predict’.

Howard Archer, chief UK economist at IHS Global Insight, commented that: ‘The more worried that consumers are, the less likely they will be prepared to splash out on as big-ticket an item as a car.’

‘The substantial fiscal squeeze will increasingly hit public sector jobs and consumers’ pockets, while households already face high unemployment, muted earnings growth, elevated debt levels and high fuel prices.’

It was the same throughout the EU. Across Western Europe, new car sales fell 18.5% in July compared with the same month a year earlier. Europe’s biggest car market, Germany, experienced one of the biggest falls. It sold 100,000 fewer cars last month, a drop of 30.1%. only Greece saw a bigger 62.5% fall.

In the UK the prospect is that a leap in inflation will force an interest rate rise in the late Autumn or the New Year, out of fears that Sterling will collapse. This will trigger a further collapse in the housing market and see tens of thousands lose their homes.

The only way out of this capitalist crisis and collapse is through organising a socialist revolution to put an end to the capitalist system and bring in socialism.