Bank of England should hold interest rates, Morning Wire Shadow MPC says
The Bank of England should hold interest rates to get inflation back down to two per cent, Morning Wire’s Shadow Monetary Policy Committee has said, as policymakers find insufficient evidence to lower borrowing costs.
The nine economists, who responded independently from their respective organisations, said recent data on price growth should be treated cautiously by the Bank despite the prospect of inflation rapidly easing after April due to lower energy bills.
Members of Morning Wire’s Shadow MPC warned that business survey data showed cost pressures increasing and momentum in the UK not falling at a rapid enough pace to warrant an interest rate cut.
Economists voted 7-2 in favour of leaving interest rates on hold. City forecasters, including UBS, have predicted a similar balance of voting across the MPC.
It would leave interest rates at 3.75 per cent.
Markets have all but priced in for interest traits to be held on Thursday. Inflation in the year to December stood at 3.4 per cent.
Jonathan Haskel, a former rate-setter, said inflation had proven to be “persistent” and that a blog post written by staff at the Bank of England showed there to be little effect of Chinese trade diversion weighing down more heavily on UK inflation.
The independent economist Julian Jessop said it was “increasingly hard to justify” lowering interest rates given they were already around neutral levels.
Peel Hunt economist Kallum Pickering said interest rates should be cut as wage growth was “comfortably in the safe zone” and some measures of price growth showed inflation coming closer to the Bank’s two per cent target.
Anna Leach – Institute of Directors, chief economist
Vote: Hold
What has influenced your decision?
“The reality is that inflation remains high at 3.4 per cent and has risen in the most recent data. Both services and food inflation remain around 5 per cent and have also risen in the most recent data, and inflation and price-setting expectations remain strong. So it’d be a surprise to see the MPC feeling comfortable cutting rates.
“Disinflationary pressures are building. In November, the Bank of England was expecting inflation to fall to an average of 2.9 per cent in the second quarter.
“By December, they’d revised their expectation for April to “closer to two per cent”, which is quite a sharp correction. Of course 0.5 percentage points of this are from Budget decisions, but food and commodity inflation is also softer than expected.
“The rising risk of job losses may reinforce weakness in consumer spending and amplify broader softness in demand, which could bring down inflation even further. This’ll be a rate hold, but there’ll be more cuts to come this year.”
Ben Ramanauskas – Senior research fellow in economics at Policy Exchange
Vote: Cut 25 basis points
What has influenced your decision?
“The recent uptick in headline inflation will concern the Bank, but this was largely driven by airfares and an increase in tobacco duty. While food inflation is an issue, growth in core inflation has remained stable and private sector wage growth has slowed.
“The Bank expects inflation to fall towards target in the coming months due to monetary policy and government measures such as the rail fares freeze.
“The labour market continues to show signs of cooling due to the hike to employers’ national insurance, increases to the minimum wage, and concerns over the Employment Rights Act.
“Economic growth as well as business and consumer confidence remain subdued. Monetary policy is currently restrictive and failing to cut rates now risks exacerbating the problems plaguing the UK economy and inflation falling below target.”
Jack Meaning – Barclays chief UK economist
Vote: Hold
What has influenced your decision?
“Unemployment is rising, wage growth metrics are clearly slowing and underlying inflation is on course to drop to two per cent or lower by the middle of the year.
“However, interest rates have now been cut six times and the impact of those historic cuts is only just starting to be felt on the economy.
“I therefore think there is no need to accelerate the pace of easing and reduce rates again so soon after December’s cut, especially when there is significant uncertainty and doing so might deliver a shock to the market.”
Jonathan Haskel – Professor of Eeconomics at Imperial College Business School and former MPC member
Vote: Hold
What has influenced your decision?
“Inflation is proving persistent. Expected wage rises are inflationary at current productivity growth.
“Finally, a recent Bank Underground blogpost by Bank staff shows no disinflationary effect from trade diversion of Chinese goods away from the USA towards Europe.”
Julian Jessop – Independent economist
Vote: Hold
What has influenced your decision?
“It is increasingly hard to justify cutting interest rates any further now they are back within a ‘neutral’ range of three per cent to four per cent. Indeed, the economic news over the last few weeks has tipped my vote towards leaving rates at 3.75 per cent.
“Business surveys suggest that underlying cost and price pressures remain strong and may even be strengthening, while inflation expectations are still too high for comfort. Growth in broad money and credit is also accelerating.
“Activity continues to be weak, especially hiring, and both business and consumer confidence are fragile.
“The markets are not expecting a cut this week, making it safer to wait.”
Kallum Pickering – Peel Hunt, chief economist
Vote: Cut by 25 basis points
What has influenced your decision?
“Economic fundamentals have turned decidedly disinflationary. Demand growth is soft, labour markets are loosening, and private wage gains are now comfortably in the safe zone. Meanwhile, annualised measures of inflation – which help to abstract from base effects – show recent rates of price growth close to the two per cent target.
“As current policy is still tight, and because of the long transmission lags associated with changes in the Bank rate on the real economy, further easing is required to avoid a period of unnecessary growth weakness and to mitigate the risk that inflation undershoots the two per cent target in the second half of 2026.
“I would strongly favour sending a signal that policy is now more focused on downside risks to growth and inflation, and that the Bank is prepared to ease more aggressively if such risks materialise.”
Katharine Neiss – PGIM Fixed Income chief European economist
Vote: Hold
What has influenced your decision?
“The UK economy continues to ease, but not alarmingly so. That keeps the door open for the MPC to take a wait and see approach against a backdrop of still elevated inflation.
“That said, near term momentum in inflation has eased notably. Should that continue, I would expect the MPC to pivot to a more assertive rate cutting path as it plays catch-up on rate cuts with other developed market peers.”
Ruth Gregory – Capital Economics deputy chief UK economist
Vote: Hold
What has influenced your decision?
“There are sound reasons for pausing, at least for now. The public’s medium-term inflation expectations picked up in January.
“If the nine per cent jump in the oil price since 26th January is sustained it would add 0.2 percentage points to CPI inflation in both 2026 and 2027.
“The flash PMIs suggest inflationary pressures are increasing. And even though the jobs market has weakened further, the Brightmine and the Bank of England’s decision makers’ panel surveys suggest pay growth will remain elevated this year. So, there is a risk that if rates are cut too quickly, this could embed above-target inflation.”
“But we know inflation will fall sharply in April given the drop in regulated, otherwise government-set, price inflation. In time, the weakening in the labour market should exert more downward pressure on wage growth.
“I would signal an openness to cut rates in the coming quarters to return Bank Rate to a more neutral setting, perhaps of about three per cent.
Vicky Pryce – Centre for Economics and Business Research chief economic adviser
Vote: Hold
What has influenced your decision?
“Geopolitics is entering yet another unsettled phase but a relatively strong pound should allow more interest rate cuts to boost growth and bring bond yields down.
“However, it is worth waiting to see what the next set of inflation, employment, wages and GDP figures tell us about the underlying strength of the economy to more clearly determine rate path ahead.”