CITY A.M. Shadow MPC votes for hold
Once again Morning Wire’s shadow MPC Committee has unanimously agreed to keep interest rates on hold at 5 per cent.
It is the second month in a row the committee has been in agreement as all believe the MPC’s concern over rising prices will trump the slowdown in growth.
This month the committee has a temporary new member. Dominic White from ABN Amro has kindly stepped in to cover for Simon Ward from New Star Asset Management who is away on holiday. Although he’s a hold now, he says it’s hard to call the direction of rates over the next few months.
Lloyds TSB’s Trevor Williams is once again proving to be the most ferocious hawk, saying he expects the next move to be a hike, and that it’s important to be tough on inflation.
“Even if the economy weakens as expected, the eventual fall in inflation will not be sufficient to justify a cut in Bank rates as the world backdrop is much more inflationary that at any time since the early 1990s,” he says.
Analysts Views
Alister Heath (Morning Wire): “This is a case of wait and see. The economy is dangerously close to stagflation, with spiralling inflation and a looming recession. Any change in rates would be very risky; best to do nothing at least for another month.”
Trevor Williams (Lloyds TSB): “This is not a time to raise rates. The Bank still has to wait to see if inflation’s effects are spreading into the wider economy before being sure that a rate rise will not plunge the banks back into difficulty and threaten recession.”
Dominic White (ABN Amro): “Keep rates steady. Ultimately the MPC needs to pay more attention to inflation than the activity numbers. The outlook for policy is pretty finely poised and the MPC needs to stand steady to move rates in either direction.”
George Buckley (Deutsche Bank): “Price pressures are intensifying at the same time growth conditions are weakening – raising the risks of recession. Inflation will abate in response to the economic slowdown, but until then holding may be the best policy.”
Paul Dales (Capital Economics): “Hold. While the chances of an interest rate rise have receded significantly, the likelihood of a near-term cut is also slim. But the cost of keeping a lid on inflationary pressures now looks like a strong chance of a technical recession.”
Howard Archer (Global Insight): “Hold. I am becoming markedly more concerned about the very real risk of recession, but current elevated inflation levels and risks effectively preclude cutting interest rates at this stage.”
Michael Saunders (Citigroup): “I expect the MPC to leave rates on hold this month. Nevertheless, even though the economy is nose-diving, there is a risk the MPC will hike in coming months to re establish their fading anti-inflation credibility.”
Diana Choyleva (Lombard Street Research): “I would vote hold. Evidence that growth is slowing sharply is accumulating. But it would be damaging for credibility to cut while inflation is accelerating fast.”
Graeme Leach (Institute of Directors): “Given that inflation is well above target and rising, there is no case for any easing in policy at present. However, the economy is clearly slowing and this will in due course exert a downward pressure on inflation.”