Hawks circle as economy booms

THE BANK of England is facing growing pressure to reconsider its cheap money policies after another set of business surveys will today point to strong growth across the economy.

The Confederation of British Industry (CBI) said this morning it now sees the economy growing by three per cent this year, up from its forecast of 2.6 per cent just three months ago. It now sees the Bank raising interest rates as soon as the first quarter of next year.

The survey forecasts unemployment falling to 6.2 per cent in 2015.

Adding fuel to the fire of the hawks’ – those in favour of a rate hike – is this morning’s regional purchasing managers’ index (PMI) from Lloyds, which shows that business across the UK registered robust growth again in April.

Across England the PMI reading climbed to 59.3, up from March’s 58.1, the fastest increase since December. London’s growth is still the strongest, with a score of 62. Any figure over the neutral 50 level indicates growth.

In Yorkshire, the north west, the east of England and east midlands, businesses reported the strongest expansion in employment in the survey’s 13-year history, suggesting that unemployment is set to plummet.

The upbeat outlook comes ahead of Wednesday’s crucial quarterly inflation report from the Bank, which will be watched for signs that it is moving towards raising rates or embracing other forms of monetary tightening.

Many economists also believe that the Bank may start to use its new macro-prudential tools earlier than previously expected.

“We expect the Bank of England to tacitly accept in [the] inflation report forecast update that the first hike will come in the first quarter of 2015 instead of the second quarter date they had planned on three months ago,” said Rob Wood, chief UK economist at Berenberg.

The inflation report will indicate how much slack the Bank thinks is left in the economy, along with its forecasts for growth and inflation – two key projection that will help to determine when interest rates will finally begin to rise again.

Howard Archer at IHS Global Insight said that recent strong growth could lead to dissent on the nine-strong MPC. “Opinions within the MPC are likely to become increasingly diverse from now on about exactly when monetary policy should start to be gradually tightened and the more MPC hawkish members may well start to favour a first small rate hike before the end of 2014,” he said.

Michael Saunders, chief economist at Citigroup, said: “The emphasis is likely to shift from ‘low for longer’ to a vague message that tightening will be ‘gradual’ and ‘limited’. The risk that rate hikes – when they come – trigger a very sharp pull back in spending will be much less if tightening is well anticipated and the case for tightening understood.”

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