Bank of England must hold interest rates and wait for signs of a rebound says shadow MPC
City economists are all but certain the Bank of England will not announce a rise in interest rates tomorrow, with Morning Wire’s shadow monetary policy committee (MPC) voting unanimously to hold fire.
The Bank’s top economists have made it clear that they see rising upward pressures on wages, a key component of domestically generated inflation, after almost two years in which exchange rate effects have dominated the headline consumer price index inflation outlook.
However, the unanimous vote against raising rates by the shadow MPC, which is generally more hawkish than the Bank, reflects the deep uncertainties in the UK economy after very weak first-quarter data.
GDP grew by only 0.1 per cent in the first three months of 2018, with some economists struggling to see signs that the slowdown is temporary.
Read more: Bank of England to hold rates as weak economy spurs investment boost call
Meanwhile, political uncertainties around the Brexit vote have only mounted, almost exactly two years on from the EU referendum.
The global economy looks less likely to add a further upside surprise as it has done in the past year, given US President Donald Trump’s efforts to implement a protectionist trade policy which economists overwhelmingly believe would damage growth around the world.
The shadow MPC
Kallum Pickering, senior UK economist, Berenberg bank
HOLD Although headline inflation remains above the two per cent target and tight labour markets point to building inflation pressures over time, the mixed start to the second quarter and the softer-than-expected wage growth in April signals the need to tread carefully. Three conditions must be satisfied before hiking again: 1) a rebound in real GDP growth in the second quarter and third quarter to at least the BoE’s estimated potential rate of 1.5 per cent; 2) a rise in annual nominal wage growth to above three per cent; and 3) survey data showing continued above-target inflation expectations and falling spare capacity.
Mike Bell, global market strategist, JP Morgan Asset Management
HOLD Some lead indicators suggest wage growth could soon start to accelerate, so the case for a rate hike is building. However, there’s no rush to raise to rates this week given still high political and economic uncertainty.
Simon French, chief economist, Panmure Gordon
HOLD There are three main sources of uncertainty in the UK economy: the source of the first-quarter slowdown, the progress of Brexit negotiations and the impact of higher petrol prices. Hold bank rate while assessing these uncertainties further.
Ruth Gregory, UK economist, Capital Economics
HOLD Given the mixed economic data since May. But leave the door open for a hike in August if the economy regains some momentum and wage growth accelerates further.
Jeavon Lolay, head of economics and strategy at Lloyds Bank Commercial Banking
HOLD Further evidence that activity is on a stronger footing is required before a rate rise. The labour market continues to perform well and wage and domestic inflationary pressures could build.
Jacob Nell, chief UK economist, Morgan Stanley
HOLD The MPC should hike rates modestly over time, given rising labour costs. But in June, after mixed data, it should wait for clearer evidence of a rebound before acting.
Tej Parikh, senior economist, Institute of Directors
HOLD The anticipated bounce-back in economic activity since the first quarter has so far underwhelmed, sustained wage growth remains elusive, and even promising retail sales appear driven by transient royal wedding and hot weather effects – best to hold fire.
Vicky Pryce, chief economic adviser, Centre for Economics and Business Research
HOLD The recovery from the slow first quarter is rather subdued, forecasts for this year are being downgraded partly reflecting weak investor confidence and the international trade environment looks increasingly uncertain.
Simon Ward, economic adviser, Janus Henderson Investors
HOLD Monetary trends are signalling weak economic prospects and receding inflation risks. Annual growth of non-financial M4 – the most informative broad money measure – has fallen from nearly seven per cent in 2016 to three per cent, a six-year low.
Read more: John McDonnell wants the Bank of England to target productivity growth