Wednesday, 21 June, 2023
The Times – Raise interest rate to 5%, Times’ shadow MPC tells the Bank
The Times – Raise interest rate to 5%, Times’ shadow MPC tells the Bank
Wednesday June 21 2023, 12.01am, The Times
The Bank of England should raise interest rates to 5 per cent this week in an aggressive move to fight back against stubbornly high inflation, according to The Times’ shadow monetary policy committee.
In a 6-3 vote split, the shadow MPC — made up of former ratesetters, ex-Treasury officials and economists — voted in favour of an increase of half a percentage point to the base rate from its present 4.5 per cent. This is higher than market expectations of an increase of 25 basis points tomorrow.
Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, said the outsized rise was needed to show the Bank’s resolve against headline inflation, which is at more than four times the central bank’s target and has not fallen in line with expectations this year.
“Further hesitancy will only lead to further loss of credibility. [The MPC] needs to act decisively,” she said.
The latest inflation data for May will be released today. Official figures from April showed that private sector wages were rising at their fastest pace in more than three decades, leading investors to increase their forecasts for borrowing costs and driving up the cost of mortgage lending this month.
Charles Goodhart, the economist, an external member of the MPC in 1997, said the Bank’s reputation for inflation-fighting was “coming under threat”. Despite “a reasonably strong case” for a strong decision and an increase of 50 basis points, he said he would vote in favour of a smaller move — but would “wonder if that was the right policy”.
No MPC member voted for a rise of half a percentage point when the decision was last taken in May. It is expected the MPC will increase rates by a quarter of a percentage point, from 4.5 per cent to 4.75 per cent, taking the base rate to its highest since October 2008.
How the shadow MPC voted
Andrew Sentance: 50 basis points
The MPC needs to send a clear signal that it is determined to break the wage-price spiral that seems to be emerging. Regular pay increases in the private sector are now at 7.6 per cent and services sector inflation is picking up as goods inflation is subsidising. The present rate of pay increases could push up services inflation even further.
At the same time, the real economy appears to be resilient and the labour market remains tight. The MPC made the mistake of being too timid earlier in this cycle of raising interest rates. It should not make the same mistake again. It should signal it is prepared to do what is necessary to bring down inflation by making a robust 50-basis-point move at this month’s meeting and explaining clearly why this is necessary.
Karen Ward: 50 basis points
Earlier hesitancy has put the Bank in an uncomfortable spot. It hoped for too long that inflation would go away on its own accord and underestimated the second-round effects now evident in accelerating wage growth. It did not adhere to the “stitch in time saves nine” principle and now will have to raise rates by more and cause a deeper downturn to bring inflation back to target.
In the coming months, an increasing number of households will switch to significantly higher mortgage rates. This will have a big impact on their disposable incomes. However, this is only one part of the economic story. Savers have seen the income on their deposits rise, while wages growing at 7 per cent are also supporting demand. On balance, the main business services purchasing managers’ index does not suggest demand is meaningfully decelerating.
Sadly, I do not believe the Bank can return inflation to target without a contraction in activity to realign demand with weaker supply. Further hesitancy will lead only to further loss of credibility. The need is to act decisively. For that reason, I would vote for 50 basis points at Thursday’s meeting.
Charles Goodhart: 25 basis points
Recent data on inflation, wages, expectations and even demand have all cast doubt on the speed with which inflation might return to target. As a result, the credibility of the Bank is coming under threat. This suggests there is a reasonably strong case for making a strong decision to reaffirm the Bank’s determination to fulfil its mandate to maintain price stability. That would imply an increase of 50 basis points this time.
However, that would be a shock and is risky, for several reasons. If it resulted in headline bankruptcies and/or led fairly directly to a significant recession, the Bank could be subject to severe criticism for overdoing the pressure.
Since I am a card-carrying certified coward, I think I shall end up voting for the obvious standard 25-basis-point increase — but I would always wonder if that was the right policy.
Martin Weale: 50 basis points
Inflation is proving to be resilient, with growth in wages a particular sign that it is increasingly bedding in. I would increase Bank Rate by half a percentage point in the hope that it will be possible to pause increases at the next meeting. But for that to be justified, I would want to see evidence of inflation easing, or at least of a material slackening in the labour market. One might hope this could be achieved by an increase in labour supply.
The Bank should not be giving guidance on the future path of interest rates. The MPC votes on present rates, not on future ones, and any forward guidance can be a hostage to fortune.
Kitty Ussher: 25 basis points
With April’s inflation and wages both higher than expected and the private sector exhibiting growth, interest rates will need to keep rising.
In advance of May’s inflation data being released, we know food price rises may have peaked, households with mortgages are feeling the pain of previous rate rises, business confidence stalled in May, insolvencies are sharply up and labour supply is increasing among people who previously were excluded because of caring responsibilities as they find ways to work remotely. In the absence of new information, a 25-basis-point rise feels appropriate.
Sir John Gieve: 50 basis points
The latest labour market data show the labour market is still tight and employers feel that they can raise prices to cover pay increases. These are classic signs of demand outstripping supply, so the case for a further rise in rates is clear.
There is a risk that inflation is becoming more embedded in the UK than it is in the United States and the European Union, reflecting our poor supply performance and the lack of the regional balancing factors that exist in continental economies. The Bank must not allow that to happen.
I expect the majority of MPC members to support another 25-basis-point increase and there is a case for “feeling their way forward”, given the uncertainties. But I would be inclined to vote for a rise of 50 basis points this time precisely because it would be a shock to expectations.
I would certainly not indicate that market expectations of further increases are mistaken or overdone.
Bronwyn Curtis: 25 basis points
Monetary policy takes time to work and I am not sure that the impact of the rate hikes we have seen already have worked through yet. Another 0.25-percentage-point increase will not be enough to dampen inflation expectations and wage demands and a contraction in activity may be the only solution.
However, the cumulative impact of the rate hikes we have already seen, in addition to a 0.5-percentage-point rise this month, runs the risk of a nasty unexpected event. I am not concerned about the banks, as they are well capitalised, but, after years of very low interest rates, other key parts of the economy may not be so well protected. So I am voting for a quarter-point hike.
Sir Steve Robson: 50 basis points
Core inflation is at a 30-year high. Wage growth is 7 per cent and so far is outstripping productivity. The elephant in the room is fiscal policy, which is far too expansionary in the present conjuncture. Monetary policy is being required to do too much of the heavy lifting. It is not surprising that inflation is proving resilient.
Anne Sibert: 50 basis points
Both headline and core inflation are stubbornly high and wage inflation suggests that inflationary expectations are worryingly high as well. Unfortunately, fiscal policy is a significant contributor.
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