- Recent comments by Bank of England governor Andrew Bailey and some others on the Monetary Policy Committee suggest it is difficult to tell whether this week’s meeting will see interest rates rise for the first time since November 2017. But while a minority on the committee may vote for a rate increase, the EY ITEM Club thinks most will choose to wait.
- In its last meeting in September, the MPC judged that it would be desirable to assess the impact of the end of the furlough scheme before changing policy. But data to make that assessment are still lacking. And given the growing cost of living pressures faced by households from higher inflation, rising energy bills and forthcoming tax rises, raising interest rates now could exacerbate pressures and risk knocking confidence – and the recovery – off course.
- The risks of continuing a ‘wait-and see’ approach for a few more months are comparably low. The global forces pushing inflation up are largely beyond the ability of monetary policy to influence, and there is little evidence of inflation expectations among the public breaking out. Meanwhile, tightening policy when other major central banks are still in loosening mode would seem incongruous, particularly when the UK economy was more affected by the pandemic than the US and the eurozone.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“November’s MPC meeting will probably see the split on the committee, evident in recent months, widen. Based on recent comments and voting records, three members seem likely to vote for an immediate rise in Bank Rate. But the EY ITEM Club thinks the majority will stick with no change.
“Recent economic developments could sway the committee either way. On the one hand, the consumer picture has dimmed. Retail sales fell in September for the fifth successive month, and GfK’s measure of consumer confidence in October reached an eight-month low. Plus, sluggish growth over July and August points to GDP in Q3 rising by around 1.6% quarter-on-quarter, well below the MPC’s 2.9% forecast in August.
“On the other hand, revisions to the second quarter GDP showed the economy closer to its pre-pandemic size than initially thought. Unemployment fell further over the summer, and job vacancies rose to a record high. October’s flash PMIs showed activity regaining momentum that month and cost pressures at the strongest in the survey’s history. And although CPI inflation dipped to 3.1% in September from 3.2% in August, the influence of (temporary) base effects and recent developments in commodity prices imply the fall will be short-lived. The MPC is likely to have to revise up its near-term inflation forecast from 4% to closer to 5%. Meanwhile, October’s Budget dialled back the extent of fiscal tightening over the next few years.
“But, on balance, the EY ITEM Club thinks the MPC will go for inaction for the time being. A majority of members in September’s meeting said they wanted to assess the impact of the furlough scheme’s end on 30 September before considering a policy move. But the evidence to make that assessment is still lacking. The EY ITEM Club doubts that the MPC would row back from its guidance, particularly when the case for a rate increase has not obviously risen in the interim. And raising interest rates now would add to the already considerable financial pressures households are facing from rising inflation, expensive energy and next April’s personal tax rises. Moreover, tightening policy when other major central banks are still in loosening mode would seem incongruous, particularly when the UK economy was more affected by the pandemic than the US and the eurozone.”