So, Christmas has been and gone for yet another year, the snow is behind us (for now at least) and the much debated VAT rise is already in force...welcome to 2011! 

The present outlook for industry is probably one of relative stability, rather than the rapid growth that all parts of the economy seem to demand.  However, we would question whether ‘relative stability’ will actually be the best platform from which the market can prosper.  Okay, we agree, that in the short term, this does mean we are all going to feel the pinch of spending cuts and rising taxes, but the economy, and industry, needs a base from which it can build.

Inflation for the last year has remained relatively stable, starting the year at 3.5% and ending at 3.3%, without any drastic changes during this period.  Similarly, Bank of England Base Rate has remained at 0.5% for the period, whilst the three month Libor rate (widely viewed as a better indicator of rates in the market) has risen c.0.15%, from c.0.6% to c.0.75%.  The only major change we have seen today, is the rise in VAT to 20%, although as there was a similar increase in VAT this time last year, it will have a neutral impact on inflation.

In the longer term, inflation will probably become the key contributing factor on interest rates.  To control inflation, the Bank of England has one option, to increase rates.   We can see that the market is expecting this rise, since the Libor rate has already increased in preparation (Libor is generally 0.10-0.20 points higher than base rate).  The difficult question will be, when will this happen?