AS 2014 gets underway, our shadow monetary policy committee votes to keep interest rates and QE unchanged in January.
Two members voted for a rate hike again this month, as official statistics responses to business surveys continue to reinforce the view that the UK economic recovery was strengthening as 2013 rolled to an end.
Most members are still unconvinced that a change in policy is necessary, even as unemployment falls towards Bank of England governor Mark Carney’s seven per cent benchmark, which he announced as the monetary policy committee (MPC) threshold to begin considering an increase in interest rates.
Some analysts now think that with unemployment diminishing, the MPC will attempt to shift the threshold for unemployment down, keeping monetary policy ultra-loose for a longer period.
After the recent withdrawal of Funding for Lending for the mortgage market by the Bank of England, Martin Beck of Capital Economics suggested earlier this week that Carney will continue to lean on macro-prudential tools this year, and that no interest rate hike is likely in 2013.
Many members of our shadow MPC referenced the fact that output is still around two per cent below the pre-crisis peak in 2007/08, and that policy should be kept relatively easy for the time being. However, many forecasters now suspect that GDP will rise back above this symbolic benchmark during 2014.
CITY A.M. SHADOW MPC VOTES 7-2 AGAINST RATE HIKE
ALLISTER HEATH | CITY A.M.
“Business surveys and official statistics are constantly adding to the evidence that a robust recovery is underway, and emergency monetary policy is increasingly dangerous. The MPC should vote for an overdue 0.5 per cent hike in the Bank rate”
GRAEME LEACH | INSTITUTE OF DIRECTORS
“We’re not there yet with regard to raising interest rates or reversing quantitiative easing, but for the first time in years we can seriously consider the possibility. Is that good news or bad?”
GEORGE BUCKLEY | DEUTSCHE BANK
“The year is off to a positive start with the recovery continuing, house prices and car sales up sharply. But with output still below its pre-crisis peak, the Bank is under no pressure to tighten policy.”
SAMUEL TOMBS | CAPITAL ECONOMICS
“Hold rates and lower the unemployment rate threshold to 6.5 per cent. Inflation looks set to drop below two per cent this year, so the MPC can do more to support the recovery.”
ROBERT WOOD | BERENBERG BANK
“The Bank should allow its forward guidance policy to whither away as unemployment falls to seven per cent. We can probably hold on until early next year before hiking rates, but no longer.”
SIMON WARD | HENDERSON
“Raise Bank rate by 25 basis points, signal likely further increases. M1 money supply expansion is in double-digits, and price-raising plans are firming as capacity and labour shortages increase.”
VICKY PRYCE | EX-GOVERNMENT ADVISER
“Hold. Confidence and growth are improving but business lending, investment and exports lagging behind. Despite rising employment, inflation remains subdued.”
TREVOR WILLIAMS | LLOYDS BANK
“The economy is recovering but inflation is falling, likely to be below target in a few months time. Despite revisions UK output is still below its pre-crisis peak and unemployment remains high.”
ROSS WALKER | RBS
“Lower inflation at home, and uncertainties around the recovery abroad, weigh against any early withdrawal of stimulus. But I am not persuaded that the unemployment threshold should drop.”