The Bank of England is set to announce monetary policy at its latest meeting this afternoon.
Investors don’t expect anything in the way of change, but as always economists will try to read the runes of the Monetary Policy Committee’s (MPC) statement to see how the Bank’s economists think the UK economy is faring.
Our Shadow MPC thinks the Bank is right to hold rates, but dissent is growing as the UK economy continues to fare better than many economists predicted.
Here are four things to watch out for from the real thing:
1. Inflation: turning the other cheek
The pound’s devaluation since the EU referendum has made prices of foreign goods rise considerably, raising headline inflation. The Bank doesn’t expect inflation to return to target within the next three years, with prices rising by 2.7 per cent in the fourth quarter of this year.
In normal circumstances this would be prime time for a rate hike, but with the UK about to start the process of leaving the EU Carney is unlikely to act now. Watch out for mention of domestic inflationary pressures for a better sense of the MPC’s thoughts.
2. Employment zen and wages adages
Part of the rationale the Bank has used to justify its loose monetary policy is an adjustment in the “equilibrium” rate of unemployment: the theoretical (and extremely difficult to measure) lowest rate at which wages will not be inflated.
The Bank lowered its equilibrium rate from five per cent to 4.5 per cent, in a move which attracted some criticism from outside, and internal dissent. MPC member Ian McCafferty later told MPs he thought the move in the equilibrium rate may have been too large.
However, the case for the move has been supported by data since then, which have seen unemployment fall to the joint lowest level since 1975 but weak growth in real wages.
Any signs of how the Bank judges the appropriateness of its move in the equilibrium rate and the prospects for wages will give an insight into their outlook on the labour market.
3. A bad case of consumption
Andy Haldane, chief economist, admitted in January the Bank had a “Michael Fish moment” over its prediction a Brexit vote would lead to an immediate slowdown.
The source of their error: the strength of the UK consumer. The uncertainty the Bank saw in the aftermath of the referendum was not shared by households, which have continued to spend, making the economy actually accelerate at the end of the year.
However, with real wages set to be squeezed by rising inflation, the first signs of softening demand may be coming through in weaker retail figures. Mentions of perceived weakness in the consumer sector will not go down well.
4. Brexit affects it
Hanging over all of this is the defining issue of this decade and beyond for the UK: Brexit.
In different circumstances (had Nicola Sturgeon not spoiled the party) we might have already had the trigger of Article 50 and an official timetable for Brexit. As it is, we will have to wait for some time before the end of the month for Prime Minister Theresa May to notify the EU.
The exit process is perhaps the greatest impediment to any change in monetary policy in the short term, with Carney unwilling to risk upsetting markets at a historically pivotal moment. Discussion of risks from Brexit uncertainty will therefore be crucial in understanding the MPC’s thinking.
But the Bank is no dispassionate observer. Its efforts to protect the City of London have already seen it attack currency nationalism over clearing and dismiss fears banks will move operations out of London.
More signs of a bullish outlook on London’s future in a new trading relationship would be cheered in all corners of the City.