One more rise in base rates and the bank may be done

London Briefing/Chris Johns: The Bank of England has dropped a couple of broad hints to the effect that it thinks the peak in the current interest rate cycle is close: the conventional wisdom now is that perhaps one more rise in base rates and they will be done.

This is slightly unusual behaviour for the UK's central bank, since forecasting interest rates is usually left to City analysts; the bank is usually more circumspect, eschewing forecasting of all kinds wherever possible.

The grandees of the Monetary Policy Committee know that events can quickly overtake the most careful analysis and, more often than not, leave egg on the faces of any forecaster.

The bank seems to have been persuaded that the balance of the very conflicting evidence on the state of the property market suggests that a slowdown has begun. In which case it considers its job is done.

The recent rises in interest rates have had little to do with overall inflation and have instead been, eventually, explicitly targeting house price inflation. While many of the conventional property price indices suggest that there is plenty of steam left in the market, anecdotal evidence suggests that prices are turning. Just as the property boom started in London, so it is ending.

Another small anecdote supporting the bank's views comes with the rental market. Property rents have been under pressure for some time and many landlords have struggled to let out their properties.

There were lots of reasons for this, but a key factor was the preference of just about everybody to buy rather than rent. Why rent when you are convinced that property prices are a one-way bet?

Over the last few weeks there has been a subtle but important shift: preliminary evidence is emerging that indicates a sudden turn in the London rentals market. Previously empty properties are beginning to shift and some estate agents are seeing rents showing signs of firming up.

All of this is consistent with the idea that plenty of people now expect property prices to stabilise or even fall. In such circumstances it makes a lot of sense to take advantage of low rental yields rather than to assume the burden of a huge mortgage.

One factor that might have worried the bank is, of course, the price of oil. But they profess to be very relaxed, pointing out that the real (inflation adjusted) oil price is still nowhere near its historic peak and that the UK is now far less energy intensive than it was during previous oil price spikes.

In the jargon, we use far less oil per unit of GDP than we did before, partly because of increased efficiency but also because we don't do heavy industry any more, the one sector of any economy that is voracious in its appetite for oil. I think the bank's relaxed stance is merely a pose. I suspect they are very concerned about the growth consequences of higher oil prices, but, for obvious reasons, feel unable to say so.

While the reasons to be cheerful are real, it is also true that there has never been an oil price rise like the one we have just seen, in proportionate terms at least, that has not led to a global economic slowdown or recession.

With the bank being publicly persuaded of a house price slowdown and privately concerned about the growth consequences of high oil prices, it is perhaps not surprising that they think the need for further significant interest rate rises has receded. The slightly odd announcement of their new interest rate views had the immediate effect of weakening sterling a touch, which is also a secret wish of the Bank of England.

If the risks to growth really are rising, this turn in the cycle could not have come at a worse time for the government. Evidence consistent with economic softness can be found in the labour market, with some tentative signs that unemployment is picking up again.

With a general election perhaps only nine months away, Tony Blair and Gordon Brown will be relying on Michael Howard's ongoing inability to make any connection whatsoever with the electorate; the economy, in the view of the Bank of England at least, seems unlikely to be provide much political support.