Morning Wire shadow MPC: Global stock market plunge spooks economists who vote to hold rates
The Bank of England should refrain from hiking interest rates today, Morning Wire’s shadow monetary policy committee has said.
With less room to cut interest rates should the economy take a downward turn, Anthony Yates, who spent two decades at the Bank, said it would be better to let inflation overshoot than to increase rates now. Interest rates have been at a record low of 0.5 per cent since March 2009.
The recent rout in global stock markets put many of the committee off voting for a hike, as it was viewed as a renewed risk to the global economy. James Sproule, who voted firmly for a hike last month, said his decision was now “finely balanced” due to the rise in global uncertainty.
Others on the panel believe that record employment and strong growth in money and credit mean the economy is strong enough for a rate hike.
A rate hike would follow the US Federal Reserve, which lifted interest rates for the first time in nearly a decade last month.
While employment is at a record high, pay growth slowed recently – another factor picked up by our panel of experts.
Growth in regular pay excluding bonuses peaked towards the end of last year and began to slow. Bank of England official Minouche Shafik said in a speech she would not vote for a hike until pay growth showed sustained momentum.
The Bank of England will announce its decision at midday today. Along with the decision will be the publication of the minutes – details of the discussion which takes place over three days.
The Bank’s committee voted eight to one to hold interest rates at 0.5 per cent last month.
OUR PANEL'S GUEST CHAIR FOR THIS MONTH: ANTHONY YATES, BIRMINGHAM UNIVERSITY
My own vote would be for a hold, but I would want to communicate that I would be perfectly willling to cut if inflation does not return as quickly to target as forecast, or if there is any sign of weakening inflation expectations. And in that regard, I'd ask the shadow MPC to note that, in contrast to the BoE's actual committee, and paying attention to the greater downside risks posed by our depleted toolkit, they should be looking for their most likely outcome to overshoot the target, in order that on average they would hit it.
JAMES SPROULE, INSTITUTE OF DIRECTORS
Raise. Economic uncertainty leaves decision finely balanced, but domestic demand should face more realistic cost of capital.
ADAM CHESTER, LLOYDS BANK
Hold. The turbulent start to the New Year for oil and equity markets underscores the downside risks facing the global economy.
VICKY REDWOOD, CAPITAL ECONOMICS
Hold. The recovery’s weaker than thought, the near-term inflation outlook’s weakened and global risks have grown.
KALLUM PICKERING, BERENBERG BANK
Raise. Even with modestly higher rates policy would be accommodative. Record employment and strong consumer credit growth warrant gradual rises.
SIMON WARD, HENDERSON
Raise. Liquidity growth is at an eight-year high, credit is accelerating, unemployment continues to undershoot the MPC’s forecasts.
VICKY PRYCE, BIS AND CEBR ADVISER
Hold. Emerging markets' slowdown is unsettling the markets, oil prices show further declines and UK wage growth is moderating.
ROSS WALKER, RBS
Hold. The deterioration in activity indicators and evidence of more persistent disinflationary forces mean there is no case for a near-term rise.
GEORGE BUCKLEY, DEUTSCHE BANK
Hold. Inflation remains subdued, wages are weak and economic growth has slowed. It will take stronger data than this for a rise to be appropriate.