The Bank of England is likely to hold rates unchanged at their highest levels since before the financial crisis this week, signalling the battle against stubborn inflation is far from over despite evidence of weakening growth.
The bank’s Monetary Policy Committee will opt to keep the benchmark rate at 5.25 per cent, according to pricing in financial markets. Four-fifths of economists polled by Reuters believe rates will remain steady on Thursday, with the rest predicting an increase as the BoE weighs signs of cooling activity against continued evidence of rapid rises in both consumer prices and wages.
The MPC meeting, after which BoE governor Andrew Bailey will lay out the central bank’s latest forecasts for the UK economy, will come after the European Central Bank and the Bank of Canada held rates unchanged in recent days. The US Federal Reserve is set to announce its latest decision on Wednesday, and the majority of economists predict it too will sit tight.
Central banks around the world are treading a fine line as they attempt to quell the worst inflationary upsurge in a generation without tipping their economies into deep recessions. The BoE held its benchmark rate at 5.25 per cent in its September meeting after an unexpectedly weak inflation reading the previous day.
Andrew Goodwin, chief UK economist at consultancy Oxford Economics, cautioned that while there was no immediate need for a rate rise in the UK, inflation remains “uncomfortably strong”. The bank’s critical message, he predicted, will be that “rates are going to be on hold for a long time”.
That is partly because the most recent snapshot of year-on-year consumer price inflation, released this month, was firmer than many analysts expected at 6.7 per cent. Services inflation, which is closely watched by rate-setters as a guide to underlying price pressures in the domestic economy, accelerated to 6.9 per cent from 6.8 per cent.
UK headline inflation is expected to remain higher this year and next than in many of the country’s biggest trading partners, including the US, Germany and France, according to IMF forecasts. Inflationary pressures also remain more widespread in the UK, according to Goldman Sachs, with 67 per cent of the categories comprising the consumer prices basket running above a 4 per cent annualised pace in the past six months.
BoE decision makers including Huw Pill, the bank’s chief economist, have said monetary policy will have to remain tight in response. The bank said after its September meeting, when it held rates after 14 consecutive rises, that policy will need to be “sufficiently restrictive for sufficiently long” to return inflation to the 2 per cent target sustainably.
Pill has set out a strategy he dubs “Table Mountain”, named after the flat-topped South African landmark, in which there would be a long period of relatively high but steady rates.
That reflects in part a recognition that the impact of the rate rises since 2021 has only partly fed through into the wider economy. Estimates vary, but Swati Dhingra, one of the most dovish members of the MPC, has argued against further rises, saying just 20-25 per cent of the tightening has hit home.
Rate-setters have also signalled they are watching wage growth closely as they gauge underlying price pressures. Pay growth excluding bonuses was 7.8 per cent in the June-to-August period, close to its highest level since records began in 2001. By contrast, a survey from KPMG, S&P and the Recruitment & Employment Confederation points to the softest starting salary inflation in two and a half years.
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Unemployment has, meanwhile, ticked higher, reaching 4.2 per cent in the three months to August compared with 4 per cent previously. However, flaws in the survey underpinning the official jobs data — which have forced the Office for National Statistics to instead put out “experimental” figures — will reduce the weight of that dovish reading in the MPC’s debate, according to George Buckley, chief UK economist at Nomura.
“The unemployment rate has risen a lot but the Bank of England can no longer put as much weight on that dovish piece of evidence as they did before, because of the question marks about the quality of the data,” he said.
Other indicators also point to some cooling in UK activity, including the S&P Global/Cips Composite index of purchasing managers’ output, a gauge of activity in manufacturing and services that has pointed to contraction for three months. The UK could, according to some economists, already be in the early stages of a shallow recession.
In September, the MPC voted five to four in favour of leaving rates unchanged, and this week’s vote could also be divided. While deputy governor Jon Cunliffe, one of the hawks on the committee, will have left the BoE, there will still be three members — Megan Greene, Jonathan Haskel and Catherine Mann — who called for rates to be raised to 5.5 per cent at the last meeting.
Mann has been particularly hawkish, arguing that it is better to err on the side of over-tightening, saying that the longer the current overshoot to the 2 per cent target continues, the bigger the threat of a “departure from the old ‘low inflation, low volatility’ steady state”.
Even if the majority of the MPC opts to leave rates unchanged on Thursday, the BoE has not ruled out the option of another rise if there is evidence of more persistent inflationary pressures.
The most prominent upside risk stems from the potential for the Israel-Hamas conflict to further inflame energy prices and thus inflation — and the BoE is likely to echo those concerns.
Given previous false dawns in the central bank’s attempts to drag inflation back to its 2 per cent target, economists widely expect the bank to hold firm on monetary policy until well into 2024.
“The bank knows that high inflation has dented its credibility so it will want to be absolutely sure that inflationary pressures are consistent with the 2 per cent inflation target before cutting rates,” said Paul Dales, chief UK economist at Capital Economics.
Source: Economy - ft.com
