City A.M. shadow MPC: Hold rates until after the EU referendum

 
Jake Cordell
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City A.M.'s shadow monetary policy committee voted 7-2 to hold rates this month
City A.M.'s shadow monetary policy committee voted 7-2 to hold rates this month (Source: Getty)

City economists want the Bank of England to hold interest rates on Thursday, citing stuttering growth and Brexit uncertainty as signs that the economy is too fragile to handle higher borrowing costs.

City A.M.’s shadow monetary policy committee, made up of nine banking and business economists and analysts, voted seven to two to hold interest rates at 0.5 per cent, ahead of the Bank of England’s rate-setting meeting at lunchtime tomorrow - the same split as in March.

With the real monetary policy committee expected to vote nine-nil to keep interest rates at their record low for at least one more month, City A.M.’s group saw a few more reasons to raise rates, but still not enough to tip the balance.

What they said

“The economy is losing momentum,” according to this month’s guest chair, Dr. Brian Hilliard, chief UK economist at Societe Generale.

Three of the nine members said that the Bank of England should hold off until the outcome of the EU referendum is decided, pointing to the possibility of fresh uncertainty both in the run-up to the vote and after 23 June.

“The economy appears to be going through a slightly sluggish patch ahead of the EU referendum, but not enough to justify easing policy,” said Paul Hollingsworth at Capital Economics.

Read more: Osborne liked Lagarde's Brexit warning

James Sproule, chief economist at the Institute of Directors and Simon Ward, chief economist at Henderson Global Investors, maintained their calls for the Bank of England to start tightening monetary policy.

“Seeds of coming problems have already been sown,” Sproule said, as he called on the Bank of England to act now to avoid encountering problems in the future.

City A.M.'s shadow monetary policy committee

Guest chair: Dr Brian Hilliard, chief UK economist, Societe Generale

Vote: Hold

“The economy is losing momentum. Inflation has touched bottom and should now gradually rise as oil prices move off their lows and the recent fall in the pound slowly adds to goods prices. It is unlikely to reach the 2 per cent target until late next year, though. Earnings growth is benign but, equally important, unit labour cost growth is also very low, despite a very poor four quarter productivity performance.”

Ross Walker, RBS

Vote: Hold

“The surprise upward revision to fourth quarter GDP cannot disguise the growing downside risks for the UK economy. With fiscal tightening being resumed now is not the time to raise interest rates.”

Kallum Pickering, Berenberg

Vote: Hold

“Although the economy is ready for gradual tightening, keep policy on hold until the UK’s EU fate is known.”

George Buckley, Deutsche Bank

Vote: Hold

“Fragile growth and subdued inflation buy the Bank time, while the appetite for moving rates ahead of the EU referendum appears small.”

Simon Ward, Henderson

Vote: Raise

“Contrary to popular assertion, the economy remains solid, while 2017-18 inflation risk has risen significantly, reflecting stronger broad money growth and sterling’s collapse.”

James Sproule, Institute of Directors

Vote: Raise

“Seeds of coming problems have already been sown, but modest tightening path could still lessen long term pain.”

Adam Chester, Lloyds Bank

Vote: Hold

“Although inflation is creeping higher, the heightened uncertainty surrounding the outlook warrants caution.”

Vicky Pryce, Centre for Economics and Business Research

Vote: Hold

"Manufacturing and construction data continues to disappoint and the IMF has just downgraded its UK growth forecast to 1.9% for this year, warning of downside risks."

Paul Hollingsworth, Capital Economics

Vote: Hold

“The economy appears to be going through a slightly sluggish patch ahead of the EU referendum, but not enough to justify easing policy.”

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