HOLD: Hands off interest rates, City A.M.'s Shadow MPC tells Bank of England's Monetary Policy Committee

Jasper Jolly
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Governor of the Bank of England Mark Carney Presents The Quarterly Inflation Report
Bank of England governor is expected to announce no change to monetary policy (Source: Getty)

Economists expect the Bank of England to leave monetary policy unchanged at tomorrow’s meeting of senior policymakers, but pressure is slowly growing to begin pushing monetary policy back to more normal levels.

City A.M.’s Shadow Monetary Policy Committee (MPC) voted in favour of keeping policy unchanged, but added another dissenter since February's meeting pushing for a hike.

Any deviation from the consensus would likely cause a sharp readjustment in markets, which the Bank will be keen to avoid with the government on the brink of triggering Article 50 of the Lisbon Treaty and officially starting the Brexit process.

Read more: Unemployment hits its lowest since 1975 – but the experts aren't so happy

At its last meeting the MPC has held its main interest rate, bank rate, steady at 0.25 per cent, while voting to keep the stock of government bonds purchased under quantitative easing steady at £435bn, plus £10bn of corporate bonds.

The Bank last changed bank rate in August, when it voted to cut it to support the economy after the EU referendum vote.

However, the Bank has since acknowledged the UK economy caught it out, with growth actually accelerating at the end of the year as consumers kept spending, prompting two hasty upward revisions in forecasts for this year.

Read more: What will happen to the pound after Theresa May triggers Article 50?

With unemployment at the joint lowest level since 1975 and inflation rising pressure is growing to reverse the cut and tighten the supply of money into the economy again.

But anaemic real wage growth is the fly in the ointment. The expected dent in consumer demand will likely prompt the MPC to hold fire for the rest of 2017 at least, according to most economists – and our Shadow MPC.

Chair: Yael Selfin, KPMG UK

HOLD Higher commodity prices, notwithstanding the recent fall in oil prices, are putting upward pressure on global inflation. While, in the UK, the depreciating pound is creating a double whammy inflationary effect. But circumstances in Britain, where confidence is crucial to steady the foreign exchange market and support business investment, mean that raising rates would be largely counterproductive at this point. The Bank of England will need to use other tools at its disposal to prepare borrowers and lenders for the time when UK rates finally rise.

James Sproule, Institute of Directors (IoD)

HIKE Ideally in conjunction with the Fed, but move to start some sort of normalisation is long overdue. Super low rates are unacknowledged contributor to inflated house prices.

Simon French, Panmure Gordon

HOLD There are few signs that a weak pound and rising inflation are triggering significant capital outflows or higher price expectations. Accommodative and stable monetary policy is the correct policy prescription for the UK economy throughout 2017.

Ruth Gregory, Capital Economics

HOLD Economic data have taken a bit of a softer turn recently. Moreover, there are few signs that the exchange-rate-induced rise in inflation is feeding through into higher domestic costs.

Kallum Pickering, Berenberg

HIKE by 25 basis points. The economy has reached full employment, domestic demand remains resilient to Brexit uncertainty and key debt ratios are rising – it is time to begin a gradual tightening.

Simon Ward, Henderson

HIKE by 25 basis points. What other supposedly inflation-targeting central bank would leave policy unchanged while forecasting a four-year overshoot? Real rates are becoming more negative, risking further sterling weakness and an import price-inflation spiral.

Vicky Pryce, Centre for Economics and Business Research (CEBR)

HOLD Inflation has picked up but unlikely to exceed target for long while uncertainty over the impact of triggering article 50 and signs of a more wary consumer would suggest caution.

David Stubbs, JP Morgan Asset Management

HOLD Holding policy settings stable remains the best plan. Brexit-related uncertainty remains a key downside risk, and recent signs that consumption growth may be slowing suggests now is not time to remove support for the economy.

Ross Walker, NatWest Markets

HOLD The resilience of the economy since the referendum may be beginning to fade as inflation accelerates and Brexit-related risks come into sharper focus. Still, policy is accommodative so further monetary action is not (yet) required.

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