- An ambiguous run of economic data in the last few weeks means the EY ITEM Club thinks there is a strong case for the Monetary Policy Committee (MPC) to adopt a ‘wait-and-see’ position in its next meeting and pause rate rises. But the committee’s focus on still-strong pay growth and a presumably limited appetite for surprising the markets mean another rise in Bank Rate is more likely than not. But a September increase should set a ceiling on rates.
- A run of disappointing economic data and activity surveys and growing slack in the jobs market point to the effect of past policy tightening building. And leading indicators of cost and price pressures have continued to ease. However, the MPC will be wary of still-strong pay growth.
- Inflation data for August, published the day before the MPC’s decision, presents a wildcard which could swing September’s vote either way. But the EY ITEM Club is confident that a likely further cooling in the labour market and downward pressure on inflation as less expensive energy feeds through mean another rate rise will be the last in the current tightening cycle.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Having already raised interest rates 14 times since late 2021, the Monetary Policy Committee (MPC) had, until recently, seemed destined to go for number 15 in this month’s meeting. But recent economic data means that decision looks much more finely balanced than only a few weeks ago.
“For sure, at least one of the MPC’s justifications for higher rates in the past is still an issue: wages growth has remained very strong across various measures. Headline (three-month average of the annual rate) regular pay growth in the three months to July was 7.8%, the same as the previous three months and a record high. And private sector regular pay growth (which the MPC focuses on as a measure of domestically generated inflation) was at 8.1%, close to a historic peak and running well ahead of the Bank of England's forecast for a 6.9% rise in Q3.
“But the latest data haven’t been short of reasons to rein back rate-rising instincts. GDP fell by an unexpectedly large 0.5% month-on-month in July, entirely reversing the strong rise in June. Although three-month-on-three-month growth remained in positive territory, the Bank of England's forecast for the economy to grow 0.4% quarter-on-quarter in Q3 is now looking optimistic.
“Slack in the labour market has also continued to increase. The official unemployment rate rose to a 23-month high of 4.3%, 0.5ppts up on three months earlier. The employment rate was also half a percentage point down over the same period and job vacancies fell below one million for the first time since June 2021. While still strong, private sector pay growth dipped for the first time since the start of the year. On a month-on-month basis, the private sector measure barely increased in July. And timelier, if revision-prone, payroll data showed the median of pay growth in August slowing to 6% year-on-year, an 11-month low.
“Faced with the ambiguous message sent by recent economic data, the EY ITEM Club thinks there is a strong case for the MPC to adopt a ‘wait-and-see’ approach this month. However, the committee’s focus on rapid pay growth – and a potential desire to not buck market expectations – will probably be enough to swing a majority on the MPC in favour of tightening policy again. The inflationary effect of the recent increase in oil prices may also weigh on the committee’s mind. On the subject of inflation, data for August, published the day before the MPC’s decision, presents a wildcard which could swing September’s vote either way.
“If the MPC does go for another rise, the EY ITEM Club thinks a further cooling in the labour market, downward pressure on services inflation as less expensive energy feeds through and likely policy pauses by other major central banks mean a September rate increase will prove to be the last in the current cycle.”