Low pay and inflation deter rate hike

 
Chris Papadopoullos
Follow Chris
CITY A.M.’s panel of economists voted seven to two to hold the Bank of England’s base rate at 0.5 per cent this month.

This week’s guest chair, former UK rate-setter David Blanchflower, highlighted the fact that the next move in interest rates could be a downward one. The Bank  has said lowering rates is now possible because banks are better capitalised.

It means they could deal with losses on loans where the interest is linked to the Bank’s base rate.

Rates have been at their record low of 0.5 per cent since March 2009. Meanwhile, the latest reading for annual inflation came in at 0.3 per cent in January. The Bank believes there is a good chance it will fall into negative territory in the first half of 2015.

CITY A.M.’S SHADOW MPC

OUR PANEL’S GUEST CHAIR FOR THIS MONTH: DAVID BLANCHFLOWER | DARTMOUTH COLLEGE

Hold rates. The UK economy is growing but there are some signs of slowing since last spring. There is little sign of any pick up in wage growth and we appear to be headed for deflation. The next move is likely to be to cut the rate to 0.25 per cent, to help get inflation back to target at the forecast horizon.

JAMES SPROULE INSTITUTE OF DIRECTORS
Raise rates. Steps to begin to normalise monetary policy are overdue and lengthy period of low rates potentially encourage poor investment decisions.

GEORGE BUCKLEY DEUTSCHE BANK
Hold rates. Sliding inflation could give way to a sharp rebound later in the year, but until we are more confident about the sustainability of the recovery it is prudent to leave policy on hold.

ROBERT WOOD BERENBERG BANK
Hold rates. Very low and still subdued pay growth means there is still time to wait. But strong growth and rapidly declining jobless numbers mean a rate hike will likely be needed in the next year.

SAMUEL TOMBS CAPITAL ECONOMICS
Hold rates. Although the labour market’s strength suggests that deflation is unlikely to become entrenched, it would be best to wait for proof from the pay figures before raising rates.

SIMON WARD HENDERSON
Raise rates. Monetary trends and Eurozone recovery spell continued solid growth. The labour market is nearing full employment and unit labour cost pressures are building as wages pick up.

VICKY PRYCE BIS AND CEBR ADVISER
Hold rates. Inflation could turn negative as energy , fuel and food prices fall and retailers’ price wars intensify. Recovery is shaky with investment declining in two consecutive quarters.

TREVOR WILLIAMS LLOYDS BANK
Hold rates. The economy is growing healthily but with consumer price inflation well below target and likely to fall further before rising later in the year, there is no immediate need for a rate rise.

ROSS WALKER RBS
Hold rates. The economy lost some momentum around the turn of the year, and low headline inflation risks dampening wage settlements. It is appropriate to refrain from an early rate rise.

Related articles