The Week in Review – rates on hold, car sales rise, inflation falls and service sector data supports growth hopes . Download The Saturday Economist 9th June 2012

Base rates were on hold along with QE on Thursday as the MPC voted for no change in current policy stance. With base rates at 50 basis points and 10 year gilt yields falling to 1.7%, there is little capacity for further manoeuvre in monetary policy.

Good news on inflation as manufacturing output prices fell to 2.8% from 3.2% in April. Input price inflation slowed to just 0.1%. World trade is slowing impacting on raw materials, manufacture prices and oil. Input costs will be negative in the months ahead pushing output prices and CPI inflation towards the 2% target.

The consumer is alive and well – UK car registrations were up 8% in May and private  demand grew by 14%. The PMI Markit survey for services recorded a solid 53.3 in May unchanged from April. New business flows prompted a rise in employment in the sector.

In construction, output slowed in May but to a level of 54.4 from 55.8 in the prior month – levels consistent with growth and expansion. The manufacturing figures from last week present something of an anomaly.

In Europe the Spanish banks remain the centre of attention. Recapitalization is inevitable, the quantum varying from €40 billion to €100 billion. The FANGS, Finland Austria, Norway and Germany will have to bite the bullet and back FROB the Spanish Fund for Orderly Bank Restructuring which has already spent up. The money will flow from the EFSF or the ESM or some other twist of the central bank Scrabble board. JKA

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