Shadow MPC: Inflation has fallen and so should Bank of England desire for a rate hike


It looks like it will be a lazy summer for the Bank of England (Source: Getty)

The Bank of England is highly likely to hold interest rates steady tomorrow, after the surprise fall in inflation in June eased pressure on its economists.

The Bank’s monetary policy committee (MPC) will announce its latest interest rate decision tomorrow at midday, along with its latest report on inflation and its latest forecasts for the UK economy.

City A.M.’s collection of top economists from the Square Mile and beyond has voted firmly against raising interest rates over the past year, with little appetite (despite some dissent) this time to reverse the stimulus unveiled at the August meeting last year.

Here is how they voted.


The Shadow MPC’s decisions

Melanie Baker, senior UK economist at Morgan Stanley, Shadow MPC guest chair

HOLD The labour market looks healthy, with continued robust growth in employment and with the unemployment rate having now fallen to its equilibrium level of 4.5 per cent. Inflation remains well above the two per cent target. However, economic growth has been weak in the first half of the year. Pay growth and measures of core services inflation – proxies for domestically generated inflation – remain subdued. The risk of turbulence during the Brexit talks also argues for caution on raising rates at this time.

Adam Chester, head of economics at Lloyds Bank Commercial Banking

HOLD Although a case could be made for taking back last August’s rate cut, the drop in June’s inflation rate and softer business surveys of late argue for keeping rates on hold.

Simon French, chief economist at Panmure Gordon

HOLD With currency and commodity-led inflation showing signs of having peaked, I would leave bank rate unchanged. There should be further consideration given to ceasing the reinvestment of maturing gilts and corporate debt during the second half of 2017.

Ruth Gregory, UK economist at Capital Economics

HOLD Sluggish GDP growth, along with falls in inflation and pay growth, suggest a hike isn’t yet required. But current emergency levels of policy support shouldn’t be needed for much longer.

Tej Parikh, senior economist at the Institute of Directors

HOLD The recent dip in inflation, coupled with the damper economic picture this year, strengthens the case for maintaining the Bank’s current accommodative policy.

Kallum Pickering, senior UK economist at Berenberg

HOLD for now. But send a strong signal for fourth-quarter hike if growth accelerates back to trend in the second half of the year.

Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research

HOLD Inflation has eased back and the second quarter GDP data highlighted the dangerous over-reliance on an over-borrowed consumer sector while industrial output, manufacturing and construction all fell.

David Stubbs, global market strategist at JP Morgan Asset Management

HOLD With real wages falling, savings rate at historic lows, debt levels elevated, and consumption under pressure, the MPC should refrain from removing any stimulus.

Simon Ward, chief economist at Janus Henderson Investors

HIKE by 0.25 per cent. Last month’s inflation pull-back will be temporary and the labour market has tightened further. Monetary trends suggest that growth will hold up.


MPC splits to continue

The split on the shadow MPC is expected to reflect the mood among the Bank’s rate-setters, although economists will be keenly awaiting the decisions of some swing members.

At the last meeting in June, three members of the MPC, Kristin Forbes, Ian McCafferty, and Michael Saunders, voted for a rate hike, surprising markets and leading to a big sell-off in bond markets as investors rapidly adjusted their expectations.

Bank chief economist Andy Haldane added further impetus to the market shock, saying he might back a rise this year, while even governor Mark Carney suggested he was not implacably against a hike in the near term.

Since then, however, the prospects for removing some of the stimulus introduced a year have been undermined by a fall in inflation to 2.6 per cent in June.

Meanwhile Forbes, the most hawkish member during her tenure, has now left the Bank, to be replaced by MPC debutant Silvana Tenreyro, whose views on UK monetary policy are broadly unknown.

The committee will remain one member short at the meeting, which takes place today, before recent appointment Dave Ramsden takes up his position.