No changes to rates in July
INTEREST rates should remain on hold this month at 0.5 per cent to offset the impact of fiscal tightening, according to a majority of City A.M.’s Shadow MPC ahead of today’s annoucement by the Bank of England at midday.
Seven members of the committee said that policy should remain unchanged this month thanks to concerns about a double-dip recession and the fiscal tightening measures that were announced in the Budget. Capital Economics’ Vicky Redwood even said that the fiscal squeeze might warrant further QE later on this year.
However, as in the Bank’s Monetary Policy Committee, tensions are growing in the Shadow MPC. Two members, Henderson’s Simon Ward and City A.M.’s Allister Heath both called for a hike of 25 basis points .
Ward said that faster money growth and rising expectations implied an increased risk of the current inflation overshoot becoming entrenched unless policy starts to normalise.
He added: “An inflow of foreign capital may sustain the monetary pick-up despite sluggish lending.”
However, it seems that while the more dovish members are concerned about the stubbornly-high level of inflation, there is not yet sufficient evidence to convince them that hiking rates would be the right approach at this juncture.
Most economists are not expecting the Bank of England to move this year, although they have noted that a rise in long-term inflation expectations could spur the MPC to start hiking sooner rather than later. Last month Andrew Sentance called for a rate hike. It is unlikely he will convince a majority but evidence of further dissent will be watched carefully.