MPC decision on knife edge
The Bank of England Monetary Policy Committee’s (MPC) decision on interest rates on Thursday will be a close call according to leading analysts who believe a hike is possible.
The nine-member committee, which has left rates on hold at 5 per cent for the past three months, was split three ways in July with the recent publication of the minutes of the meeting revealing it was a “difficult decision”.
Since then in spite of worsening economic data, there are fears that consumer price inflation, which hit 3.8 per cent in June, almost twice the central bank’s target, could exceed 5 per cent as the impact of utility providers’ decision to raise energy prices stokes inflation higher.
“The upcoming MPC meeting is a close call between stable rates and a hike, much closer than markets price in. If the MPC do anything near term it will be to hike. Painful economic times lie ahead,” he said.
Howard Archer, economist at research house Global Insight, said a hike was not “inconceivable”.
“Unchanged interest rates seem by far the most probable outcome, but it is not inconceivable that interest rates could be either raised or cut.”
Hetal Mehta of Oxford Economics said: “I don’t think the Monetary Policy Committee is in a position to move rates. They can’t cut when inflation is so high and they can’t hike again given all the horrible economic data we’ve had suggesting the possibility of a negative period of growth. A hike is also less likely given the recent drop in the oil price which should help lower inflation.”
Economist Michael Saunders at Citigroup says the committee is faced with two “tough” questions as to whether they can risk raising rates when the economy is “almost certainly” going into recession, and whether they can afford not to hike given its forecast that inflation will rise to 5 per cent.
Economist Views: Which way will the MPC vote on Thursday?
Philip Shaw (Investec): “The UK outlook is looking bleaker, but pressures for higher rates are likely to remain on the committee, which seriously considered a tightening in July. The MPC will keep the Bank rate steady at 5 per cent, but there is a non-negligible risk of a hike. Policy should be eased early next year, with rates at 4.25 per cent by mid-2009.”
James Knightly (ING): “We believe there will be scope for rate cuts in early 2009 as inflation fears fade in response to lower commodity prices and weak activity constrains corporate pricing power. The committee will again be split with one member voting for a hike, one for a cut and the rest for no change.”
Hetal Metha (Oxford Economics): “I don’t think the MPC is in a position to move rates. They can’t cut when inflation is so high and they can’t hike again given all the horrible economic data we’ve had, suggesting the possibility of a negative period of growth.”