Wednesday 18 December 2019 4:16 pm

Why the Bank of England should hold interest rates

The Bank of England should vote to hold interest rates at their current level until there is more clarity over the economy’s direction in the New Year, some of the City’s top economists have argued.

Ahead of the Bank’s key meeting tomorrow, City A.M.’s shadow monetary policy committee has taken a wait-and-see approach by overwhelmingly voting to keep rates as they are.

However, the mood towards a cut seems to be growing, with two dissenters arguing for rates to be lowered and others saying that the case for a cut is mounting.

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The Bank’s nine-member monetary policy committee is expected to hold interest rates at 0.75 per cent, despite pressure from some quarters for a further quarter-point cut.

Discussion over the future direction of policy has mounted following Boris Johnson’s thumping election victory last week, with hopes in the City that the landslide result will deliver a much-needed dose of political clarity.

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We asked our very own nine-member shadow MPC for their verdict on whether the Bank should cut, hold or hike interest rates tomorrow, and here is what they said:

Guest chair: Tej Parikh, The Institute of Directors

Hold

While the election result has created some near-term clarity, it’s best to wait and see how economic activity reacts and how the new Government’s fiscal plans for the new year evolve before changing rates. Business and household confidence will have been given a boost, which will unleash some pent up investment and spending activity.

This, alongside the additional public spending, could push inflation up, but it is difficult to see just yet how strong these factors will be, particularly as they come up against the counterveiling pressure of the 2020 Brexit deadline.

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Frances Haque, Santander UK

Hold

Keeping powder dry on cutting rates seems a sensible approach now that the continuing risk of a slow puncture to the UK economy from Brexit uncertainty is fading.  Better to wait and see what 2020 brings.

Erik Norland, CME Group

Cut

With the UK economy slowing, inflation contained, an unfavourable external environment with slow growth on the continent and continued uncertainty surrounding a future UK-EU trade arrangement, I would vote to cut rates by 25bps.

Peter Dixon, Commerzbank AG

Hold

Sluggish activity growth and below-target inflation suggest there is a case for a rate cut but there is insufficient evidence to support action now. Better to wait until the new year.

Mike Bell, JP Morgan Asset Management

Hold

Fiscal stimulus should support the economy in the coming year but with business surveys remaining weak, it makes sense to remain on hold for now.

Ruth Gregory, Capital Economics

Hold

Hold for now. But with inflation below target and GDP growth running below trend, signal that rates could be cut in the next month or two if the incoming economic data doesn’t improve.

Simon Ward, Janus Henderson

Cut

The MPC was understandably reluctant to move ahead of the election but the ducks are lined up, with GDP stagnant, inflation below target, wage growth cooling and sterling strengthening.

Vicky Pryce, CEBR

Hold

Hold but consider cutting in future. Though political uncertainty removed, ultimate EU-UK trade deal far from clear, UK and eurozone economies stagnating and sterling’s recovery will keep inflation low.

Jeavon Lolay, Lloyds Bank

Hold

The softness in UK data has sustained and activity growth remains below the economy’s potential. However, recent political developments offer grounds for cautious optimism on the global and domestic front.

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