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Why the Bank of England will buck the trend and hold interest rates

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Why the Bank of England will buck the trend and hold interest rates
LONDON, ENGLAND - AUGUST 6: Governor of the Bank of England Mark Carney looks on during the quarterly inflation report press conference at the Bank of England on August 6, 2015 in London, England. Members of the Bank's Monetary Policy Committee (MPC) voted 8-1 to leave interest rates on hold this month at 0.5%, where they have remained for more than six years. (Photo by Anthony Devlin - WPA Pool/Getty Images)

The US Federal Reserve and European Central Bank (ECB) both slashed interest rates at their last meetings, citing trade wars and stubborn inflation respectively.

With the UK economy in contraction – it shrank 0.2 per cent in the second quarter – and inflation falling in August, there is a case for the Bank of England to copy its counterparts and lower rates.

Read more: Into the red: UK economy contracts in second quarter under Brexit pressure

But for Threadneedle Street, Brexit trumps all else, Morning Wire’s shadow monetary policy committee (MPC) has said. Our board of top economists voted eight to one to keep rates on hold.

With the clouds of political uncertainty hanging over the UK economy, they said, Britain’s central bank should keep its main interest rate on hold at 0.75 per cent until the picture clears up.

What Morning Wire’s shadow MPC decided

Guest Chair: Ruth Gregory – Capital Economics

Hold

It is normal for the UK to follow the global trend – particularly the US – but the economic conditions in the UK don’t warrant lower interest rates. Pay growth has reached its highest since 2008. Inflation expectations have been rising. And the different starting points of the UK and US economies mean that rates won’t necessarily fall in tandem. So if there is a Brexit deal or a long delay, the UK could raise rates. If there’s a no deal, the UK could follow the US in cutting rates – but for very different reasons.

Erik Norland – CME Group

Hold

In my view, the MPC should keep rates on hold. Inflation is close to target. Brexit is still up in the air. Growth is slowing but not alarmingly so. As such, no reason to change policy just yet.

Simon Ward – Janus Henderson

Cut

Monetary trends and business surveys are weaker than in most other major economies, and inflation is below target, yet the MPC stands pat as other central banks ease – why?

Read more: Cheaper computer games push inflation to three-year low

Vicky Pryce – CEBR

Hold

Inflation is below target, business and consumer confidence remains fragile on Brexit fears. The world trade environment shows little sign of improving and UK forecasts for 2019 have been downgraded again.

Tej Parikh – Institute of Directors

Hold

It’s best to look through the inflationary pressures from wage growth and the oil spike for now given global headwinds, ongoing weakness in the economy, and the lurking possibility of a disorderly Brexit.

Peter Dixon – Commerzbank

Hold

Domestic data suggest that the case for a rate hike is not completely dead (strong wage inflation, robust GDP) but Brexit-related uncertainty makes an overwhelming case to keep rates on hold.

Frances Haque – Santander

Hold

Rushing to cut rates now would leave less room to manoeuvre if there’s a no-deal Brexit. The Bank should keep its ammunition in reserve until the Brexit outcome is known.

Mike Bell – JP Morgan Asset Management

Hold

With wage growth at four per cent but business surveys highlighting the downside risks to the UK and global economy, rates should remain on hold.

Read more: Mark Carney says negative rates ‘not an option’ for BoE

Jeavon Lolay – Lloyds Bank

Hold

Brexit uncertainty and slower global growth are weighing on UK activity. While recent data points to underlying resilience, there is a strong case for waiting before altering the monetary policy stance.