‘Stuff of nightmares’: Hold interest rates, Morning Wire Shadow MPC says
Interest rates should be left unchanged in April but the future path of monetary policy could be unclear, Morning Wire’s Shadow Monetary Policy Committee has suggested.
A group of City economists and academics has called for interest rates to be left at 3.75 per cent on Thursday, citing the risk of higher inflation due to trade disruption across the Strait of Hormuz.
Mock policymakers in the Shadow MPC, who responded independently from their respective organisations, voted 8-1 in favour of keeping interest rates unchanged though participants gave contrasting views on the future path of monetary policy.
Economists have come across conflicting economic figures over April, making the Bank of England’s upcoming decision on interest rates more difficult.
Official data suggested the UK economy grew more than expected in the first quarter of the year while pay rise expectations have also ticked up. This has fuelled concerns that higher wages could push up price growth, and vice-versa.
Inflation ticked up to 3.3 per cent in March, in what was the first sign of the impact of the Iran war on UK prices, though some economists have suggested that a weakened labour market has over the last 12 months could ease price pressures.
Government ministers have warned that the effects from the war would be felt over the whole year, further complicating any monetary policy decision by the Bank.
Interest rates dilemma
Ruth Gregory, who is the deputy chief UK economist at Capital Economics, said the upcoming vote for the Bank of England was the “stuff of nightmares” as recent data had provided a messy picture of the economy.
“The situation requires walking a fine line between keeping market rate expectations high enough to contain inflation expectations, but not so high as to damage economic growth,” Gregory said.
She added that the Bank should avoid “dialling up the hawkish rhetoric”.
The comment refers to the shock to markets last month after minutes from last month’s MPC meeting prompted traders to price in three interest rate hikes.
Short-term gilt yields later dropped to 4.1 per cent, which is equivalent to around one interest rate hike, but have climbed back up to over 4.4 per cent in the last week, with the ceasefire between the US and Iran remaining on shaky ground.
Former MPC member Jonathan Haskel, who is a professor at Imperial College Business School, was the only member of Morning Wire’s Shadow MPC to call for interest rates to be hiked.
Haskel said raising interest rates at an earlier point in time would be more effective in signalling the Bank’s commitment to keeping inflation as close to its target two per cent rate as possible.
Anna Leach – Institute of Directors, chief economist
Vote: Hold interest rates
What has influenced your decision?
“The growth and inflationary environment in the UK has changed markedly. Inflation is expected to be notably higher in the coming year but accompanied by lower growth. Already the balance may be tilting towards greater inflationary risk.
“Data from the Bank’s decision-makers panel provides reasons to believe the labour market may be more resilient than feared and price pressures greater. According to the data, two thirds of firms are expecting to push up prices in response to higher energy prices, while a similar proportion are expecting to make no changes to their workforce.
“This may increase the likelihood of the dreaded second-round effects, and worsen the stagflationary challenge for the Bank of England.”
Ben Ramanauskas – Policy Exchange, senior research fellow in economics
Vote: Hold interest rates
What has influenced your decision?
“The crisis in the Middle East has already started to have an impact on headline inflation and this is set to increase in the short-term. However, given that the labour market remains loose, wage growth has stalled, and money supply growth is at normal levels, we should not expect inflationary second-order effects or above target inflation to persist.
“The more pronounced risk from the crisis is that it further erodes business and consumer confidence, leading to firm closures and even higher rate of unemployment, with the possibility of recession.
“The Bank should look through this supply side shock and hold for now but with a much more dovish statement than last time and signal that it is prepared to resume its cutting cycle to support the economy.”
Jack Meaning – Barclays, chief UK economist
Vote: Hold interest rates
What has influenced your decision?
“Holding Bank Rate where it is delivers a modest degree of tightening compared with where we were before the Middle East conflict began, but not so much that it would unnecessarily squeeze the economy.
“Policymakers are walking a tightrope, balancing the opposing forces of higher energy prices and weaker demand coming down the track as growth slows and unemployment rises.
“There are reasons to believe that businesses and workers will find it harder to push up wages and prices in the current backdrop, and so I view the risks of stickier inflation driven by second‑round effects as less of a concern than they were in 2022 and 2023.”
Jonathan Haskel – Imperial College Business School, professor of economics and former MPC member
Vote: Raise interest rates by 25 basis points
What has influenced your decision?
“Disruption from the Middle East conflict is continuing. Since the Bank will likely have to raise rates anyway, acting now sends a clear message that the MPC is determined not to let second-round effects take hold.
“Raising sooner means less raises later. “
Julian Jessop – Independent economist
Vote: Hold interest rates
What has influenced your decision?
“Sometimes the best thing to do is nothing, especially when there is so much uncertainty.
“The MPC cannot ignore the upside risks to inflation from energy and other commodity prices. Nonetheless, the fragility of demand, the lack of corporate pricing power, and the weakness of the labour market should limit any second-round effects. Broad money growth is also subdued.
Kallum Pickering – Peel Hunt, chief economist
Vote: Hold interest rates
What has influenced your decision?
“Through disruptions to global energy markets and trade, the Iran war will impose a significant external supply shock on the UK—pushing inflation above the Bank’s two per cent target in the near term and posing downside risks to employment and output.
“However, the shock hits an economy with already tight financial conditions, aggregate demand growth at rates close to, or even below, those consistent with two per cent inflation, and cooling labour markets.
“Weak demand-side fundamentals contain the risk of second-round effects and increase the risks to output and employment. Until it becomes clearer how the shock is playing out across prices, output and employment, monetary policy should be kept on hold, and the committee should signal that the next move for Bank Rate could be either up or down.”
Katharine Neiss – PGIM Fixed Income, chief European economist
Vote: Hold interest rates
What has influenced your decision?
“Prior to the Iran crisis, I was of the view that UK rates could come down, due to the combination of a weakening domestic labour market and falling inflation.
“However, activity indicators have held up whilst the outlook for price pressures has increased. As a result, there is less pressure for the Bank of England to cut rates, while at the same time the MPC needs to signal that it is committed to limiting the degree of energy price pass through.”
Ruth Gregory – Capital Economics, deputy chief UK economist
Vote: Hold interest rates
What has influenced your decision?
“A wait-and-see approach is warranted to learn more about the size and duration of the energy price shock and the potential for second-round inflation effects.
But the risk that interest rates will need to rise this year is rising. The extent of the surge in the various PMI prices balances suggest businesses are confident in their pricing power. This comes on top of the sharp rise in the Citi/YouGov measure of 5 to 10-year ahead households’ inflation expectations which may have sparked concerns on the MPC about a de-anchoring of inflation expectations.
“This is the stuff of nightmares for the MPC and could be one reason why it takes out an insurance policy in the form of rate hikes in the coming months.”
Vicky Pryce – Centre for Economics and Business Research, chief economic adviser
Vote: Hold interest rates
What has influenced your decision?
“There is too much uncertainty in the outlook.
“Inflation is clearly on the way up but the Bank of England will have to take a view of how transitory this may prove and how fast the economy slows down. Inflationary expectations rising but no sign yet of wage pressures building up.”