Shadow MPC: City economists agree with Bank of England’s “wait and see” approach
The Bank of England is set to slash its growth forecasts and ramp up its warnings on Brexit later today, in the latest installment of economic ‘Super Thursday’.
The Bank will publish its quarterly Inflation Report – the market-moving dossier of Threadneedle Street’s latest thinking on the state of the UK economy, along with the decision and minutes of May’s rate-setting monetary policy committee (MPC) meeting.
Interest rates are set to be held at 0.5 per cent for their 86th consecutive month. Morning Wire’s Shadow MPC, typically more hawkish than the Bank, voted 8-1 to hold interest rates.
Read more: The MPC is a master of inaction
With inflation running at 0.5 per cent, considerably off the Bank’s two per cent target, and various economic indicators including trade figures, confidence surveys and GDP estimates all at multi-year lows, some analysts said they believe a few members of the MPC may be more likely to vote for a rate cut.
Financial markets put the chance of rates being cut by the end of the year at 35 per cent, analysts at Scotiabank said there is a 50 per cent chance somebody on the MPC will vote for a rate cut. The Bank of America also believe at least one person will vote for a rate cut.
In its Inflation Report, the Bank of England is expected to trim its projections for how fast the UK economy is likely to expand even further, from the 2.2 per cent it forecast in February to around two per cent.
“Since the Bank last published forecasts in February, employment gains have stalled, business surveys have weakened significantly and business investment has begun to contract sharply,” Kallum Pickering, senior UK economist at Berenberg said.
The thing to look out for, however, will be Brexit. The Bank stepped up its warnings about potential turmoil in last month’s MPC minutes and yesterday, George Osborne confirmed to the Treasury Select Committee that both his department and the Bank of England were undertaking extensive contingency planning to deal with any Brexit fallout.
Shadow MPC
Morning Wire's Shadow MPC voted eight to one in favour of holding rates at 0.5 per cent. One member voted to increase rates to 0.75 per cent.
Vicky Redwood, Capital Economics
Hold. Even without the referendum, the case for a hike isn’t strong. But no need to panic and cut either in response to latest weak data.
Simon Ward, Henderson
Hold. But raise assuming a “Bremain” vote. Broad money growth of households and non-financial firms is up to over six per cent, the fastest since 2008, signalling respectable economic prospects and a medium-term rise in inflation.
Vicky Pryce, Centre for Economics and Business Research
Hold. Brexit concerns and an uncertain international environment are affecting investment intentions and confidence, leading to weaker growth forecasts for this year.
Simon French, Panmure Gordon
Hold. Domestic monetary conditions remain supportive with risk premia compressed. No compelling case for change with recent sterling weakness returning inflation to the economy.
Kallum Pickering, Berenberg
Hold. The pre-EU referendum slowdown is not a serious concern. If the UK votes to stay, the economy should snap back in the second quarter.
George Buckley, Deutsche Bank
Hold. Weaker economic news amid Brexit fears and slower global growth suggests it should be longer before interest rate normalisation begins.
Brian Hilliard, Societe Generale
Hold. Core inflation pressures are muted and growth is losing momentum, a trend exacerbated by the uncertainty shock caused by the approaching Brexit referendum.
Ross Walker, RBS
Hold. The economy slowed in the first quarter, survey indicators signal downside risks in the second quarter and the Brexit vote looms so a rate rise is not warranted. It also makes sense to conserve the limited conventional monetary policy ammunition.
James Sproule, Institute of Directors
Raise. While the delay for EU referendum makes sense, the long-term need to normalise interest rates remains.