Shadow MPC: The Bank of England should hold interest rates amid hesitantly positive economic data
Interest rates are widely expected to be kept at their current 0.5 per cent level today, as the Bank of England (BoE)’s monetary policy committee (MPC) meets to deliver its verdict.
In the second MPC rate review of this year, due to be announced at midday, the BoE’s policy makers are likely to credit only hesitantly rising pay and below-estimated inflation as reasons for keeping rates steady.
City A.M.’s shadow MPC agreed on consensus, saying a hike could wait until economic indicators were more decisive.
Read more: What will an interest rate hike mean for house prices?
However, there is a growing expectation among analysts that the MPC might hike interest rates in May.
“In its February Inflation Report, the BoE had focused on signs of growing wage pressures, and the continued momentum in the labour market is likely to add weight to that view,” said Chris Scicluna of Daiwa Capital Markets.
“Accordingly, despite inflation surprising on the downside and concerns about softer economic growth in Q1, the MPC will likely keep open the option of a May Bank rate rise.”
Labour market data yesterday indicated that unemployment was edging down, while there was a modest strengthening in wage growth.
Analysts at Investec further noted that the Bank’s policymakers were sounding hawkish in February, with pay trends showing “small upside surprises”.
They concluded that the MPC was signalling the need for a further three hikes, to 1.25 per cent, by the end of next year.
Read more: London’s investors are more worried about low interest rates than Brexit, reveals a Rathbones survey
Though this outlook is not likely to have shifted dramatically from February, it may be that there is dissent amongst the members of the Bank’s committee on today’s decision.
Ian McCafferty, Michael Saunders or Andy Haldane could be the most likely candidates to vote for an immediate rate hike. The last rate hike, in November, was the first in 10 years.
How the shadow MPC voted
Jane Foley, head of foreign exchange strategy, Rabobank
HOLD In contrast to the signals offered by the Bank’s agents, official data continues to show benign data on wage growth. This suggests some caution is needed before the Bank tightens policy again. Hawkish expectations regarding BoE policy this year are built around the assumption that real wage growth will again turn positive in the coming months and that the Brexit process will be smooth. Both could prove to be stumbling blocks for the process of normalising interest rates.
Vicky Pryce, chief economic adviser, CEBR and former joint head of the Government Economic Service
HOLD Inflation is coming under control as the impact of sterling’s devaluation is wearing off, while consumers’ finances appear to have deteriorated in recent months putting retailers under increasing pressure.
Adam Chester, head of economics, Lloyds Bank Commercial Banking
HOLD With the economy close to full capacity and pay growth picking up, the case for another modest rise in interest rates in May is building. For now, however, rates can remain on hold.
Simon Ward, chief economist, Janus Henderson Investors
HOLD Monetary trends remain soft, suggesting subdued economic prospects and receding medium-term inflation risk. Labour market strength may be starting to ebb, while global growth is probably peaking.
Kallum Pickering, senior UK economist, Berenberg bank
HIKE Despite a weather related dip in Q1, global demand is solid and domestic demand remains firm. Wage growth is accelerating. The UK would benefit in the long run from less stimulative monetary policy.
Simon French, chief economist, Panmure Gordon
HOLD UK household incomes are set to be buffeted in April by council tax increases, increased pension contributions and working-age benefit freezes. I want to see how consumer spending responds to these challenges before making a decisive call on bank rate.
Tej Parikh, senior economist, Institute of Directors
HOLD Business activity has been solid if not spectacular recently. A few more months’ worth of data is necessary to judge just how much spare capacity there remains in the economy – as such there’s no need to jump the gun just yet.
Mike Bell, global market strategist, JP Morgan Asset Management
HOLD Agreement of a transition period is a definite positive for the UK economy but there’s no rush to put rates up straight away. There are still risks to the housing market.
Ruth Gregory, UK economist, Capital Economics
HOLD for now given the recent run of softer economic data. But signal a hike could come in May if Q1 GDP growth holds up and earnings growth strengthens further.