Bank of England should hold interest rates, Morning Wire Shadow MPC says
The Bank of England should hold interest rates as inflation could stay above three per cent for several months, top economists have said.
Morning Wire’s Shadow Monetary Policy Committee, a group of leading economists who have provided responses independently of their respective organisations, said interest rates should be kept at 3.75 per cent.
Economists warned that price pressures in the UK economy remained intense despite an apparent end to the war in the Middle East that has dramatically slowed global oil and gas trading.
Higher inflation could also leave Britons more distrustful of the Bank’s ability to combat the cost of living, according to economists, adding to the case for interest rates to remain elevated for longer.
The Shadow MPC voted 7-2 in favour of holding interest rates, with two economists calling for monetary policy to be tightened.
The economist Ben Ramanauskas, who said interest rates should be held, said the Bank would need to “signal it takes inflation seriously” despite a projected fall back to the two per cent target within two years.
‘Credibility hike’ to interest rates?
Julian Jessop and former MPC member Jonathan Haskel suggested interest rates should be hiked.
Jessop backed a “credibility” hike by 25 basis points that would send a “clear message” on tackling inflation.
Haskel said survey reports showed that there was some evidence of wage growth mounting again, which could lead to “second round effects” where price and wage pressures spiral.
Capital Economics analyst Ruth Gregory agreed that there was risk in the public’s view of the Bank of England as policymakers “won’t want to be criticised for raising rates too late and too slowly”.
But she added: “Regardless of whether rates rise this year, the weakness in activity and in the labour market will probably mean rates are cut in 2027.”
The Bank’s decision will come a day after the Office for National Statistics publishes fresh inflation data and just hours after labour market figures are revealed.
Economists have suggested that inflation will rise to three per cent in the year to May, up from April’s reading of 2.8 per cent when the changes to energy pricing stripped costs for consumers.
On Thursday, the ONS is expected to say the unemployment rate has remained at five per cent although some forecasters have suggested that jobslessness could jump to 5.5 per cent this year.
Anna Leach – Institute of Directors, chief economist
Vote: Hold
What has influenced your decision?
“The inflationary outlook remains highly uncertain with risks tilted to the upside. The Strait of Hormuz is still closed, and global oil production and distribution is set to remain disrupted for a considerable period. Best case scenarios see inflation rising above three per cent and staying there for a period.
“But only second round inflationary pressures are relevant to the MPC and those rest on the decisions of firms. Amidst elevated global and domestic uncertainty, demand is sluggish and confidence weak. And firms are reporting that they’re more likely to take a hit on profits than they are to raise prices.
‘In that environment, the MPC has a little more time to collect more data on the risk of second round effects before making a move on rates.”
Ben Ramanauskas – Economist
Vote: Hold
What has influenced your decision?
“While headline inflation remains above target, this is primarily the result of a supply side shock due to the ongoing situation in the Middle East. However, given weak demand this is unlikely to persist and so inflation should return to target in the near term.
“Sluggish growth, a slack labour market, and a million young people not in employment, education, or training means it would be inappropriate to increase Bank Rate.
“The MPC needs to signal that while it takes inflation seriously, it is prepared to resume cutting rates as soon as possible.”
Jack Meaning – Barclays chief UK economist
Vote: Hold
What has influenced your decision?
Unemployment is rising, wage growth is easing and economic growth is slowing. While inflation expectations have increased, most measures have eased back a bit since the early days of the Middle East conflict.
“The correct way to balance these two forces in the medium term is to hold Bank Rate where it is, weighing on the economy enough to contain inflation, but not so much that it crushes it.”
Jonathan Haskel – Professor of Economics at Imperial College Business School and former MPC member
Vote: Raise 25 basis points
What has influenced your decision?
“I am cautious about whether announced agreements in the Middle East will materially ease traffic in the Straits of Hormouz.
“Further, Bank of England now report that wage disinflation will be less than expected, putting upward pressure on domestic costs.”
Julian Jessop – Economist
Vote: Raise 25 basis points
What has influenced your decision?
There are many good reasons to keep rates on hold. Monetary policy is already more restrictive here than in most other countries, and the labour market is deteriorating more sharply. Uncertainty is also exceptionally high. An unexpected increase in rates could just tip the economy into an unnecessary recession.
“Nonetheless, there may be one even better reason to hike. In a word, ‘credibility’.
“Inflation has now been back above two per cent for more than a year and a half, and Bank staff do not expect it to return to target any earlier than the end of 2027. Nudging rates up by a quarter point, to four per cent, would still leave them at a historically low level.
“But it would send a clear message – including to the next Prime Minister – that the central bank will not allow inflation to spiral out of control again.”
Kallum Pickering – Peel Hunt, chief economist
Vote: Hold
What has influenced your decision?
“Although a rise in energy prices caused by the US-Iran war contributed to higher inflation, the underlying balance of demand and supply in the UK remains disinflationary. Low confidence is weighing on demand growth, while growing spare capacity in the labour market is contributing to weakening private wage momentum.
“Although inflation expectations have risen, weak demand limits the risk of inflation persistence after the initial shock fades. The news that the US and Iran are making progress towards an agreement which could open the Strait of Hormuz and ease the global energy supply shock reduces the prospect that the shock could trigger material second-round effects that would warrant a policy tightening.
“The Bank should remain data-dependent, signalling to markets that policy is already tight and that a tightening response would only be merited if peace talks fail and genuine energy shortages emerge.”
Katharine Neiss – PGIM Fixed Income chief European economist
Vote: Hold
What has influenced your decision?
“Conflicting inflation and labour market data alongside fluid geopolitical developments… is happening against a background of relatively high UK interest rates and political uncertainty.”
Ruth Gregory – Capital Economics deputy chief UK economist
Vote: Hold
What has influenced your decision?
“The US-Iran deal announced on Sunday reduces the immediate pressure to raise rates. Meanwhile, the UK economy’s strong start to the year is now faltering. The latest labour market figures have proved dismal, implying that the forthcoming rise in inflation will prove short lived. And so far, there is little evidence of the second-round inflation effects the Bank fears. So businesses may not be able to make a series of price hikes stick or be able to afford to raise wage growth.
“Modest ‘insurance hikes’ are still possible. Some of the tightening in financial conditions priced into the markets may unwind unless the Bank of England validates the market curve.
“And the Bank of England won’t want to be criticised for raising rates too late and too slowly, as it was in 2022. But regardless of whether rates rise this year, the weakness in activity and in the labour market will probably mean rates are cut in 2027.
“The expected market path of rates looks too high.”
Vicky Pryce – Centre for Economics and Business Research chief economic adviser
Vote: Hold
What has influenced your decision?
“There is very little point in raising rates which in any way are high by international standards.
“This is an external supply shock, and recent weak GDP and unemployment data suggest that all raising interest rates would do is slow economy down even further.”