A renewed drop in oil prices to below $40 a barrel has led many of the members of City A.M.’s shadow monetary policy committee to vote to keep interest rates at their record lows this month.
Inflation remained in negative territory in October, well below the Bank of England’s two per cent target. While a new drop in oil prices may weigh further on inflation, some economists on the committee expect inflation to climb strongly next year as last year’s sharp drop in oil prices fades out of the annual price comparison.
Last month, the Bank’s monetary policy committee (MPC) voted eight to one to hold interest rates at 0.5 per cent, with Ian McCafferty voting to hike rates to 0.75 per cent. The Bank of England’s base rate is currently 0.5 per cent, where it has been kept since March 2009.
The MPC will announce its next decision at midday today. The minutes of the meeting will also be announced and will present the MPC’s latest views on the developments in the economy, giving key clues as to when they might choose to raise interest rates for the first time since 2007.
OUR PANEL'S GUEST CHAIR FOR THIS MONTH: MICHAEL SAUNDERS, CITI
Hold. The economy has slowed markedly in recent quarters, and is no longer growing above trend. Consumer spending and business investment are buoyant. But, this is offset by the drag from the strong pound plus the biggest fiscal tightening of any advanced economy. Unit wage growth remains too low to return inflation to target over time and, with the disinflationary effects of sterling’s appreciation, CPI inflation is likely to average below one per cent in 2016 and stay below the two per cent target in 2017. Tighter monetary policy would risk exacerbating the slowdown.
JAMES SPROULE, INSTITUTE OF DIRECTORS
Raise. Time to normalise; avoid capital misallocation, allow gradual tightening and give monetary policy some room to operate.
GEORGE BUCKLEY, DEUTSCHE BANK
Hold. Weaker oil prices could delay inflation’s return to normal levels. While it remains well below target it may be difficult to justify raising.
VICKY REDWOOD, CAPITAL ECONOMICS
Hold. The drop in the oil price points to an even weaker near-term inflation profile and the economic recovery still needs some nurturing.
KALLUM PICKERING, BERENBERG BANK
Hike. Inflation is set to increase, the economy displays mid-cycle characteristics and robustness to external risks.
SIMON WARD, HENDERSON
Raise. Liquidity growth of over six per cent, the fastest since 2008, is too high for two per cent medium-term inflation.
VICKY PRYCE, BIS AND CEBR ADVISER
Hold. The outlook for exports is worsening, manufacturing in renewed decline and inflation likely to stay near zero.
ADAM CHESTER, LLOYDS BANK
Hold. There has been a renewed fall in oil prices and labour market conditions are not sufficiently tight to offset other disinflationary forces.
ROSS WALKER, RBS
Hold. The underlying UK data trends suggest little change: moderately sub-trend growth and muted price and wage pressures.