Tomorrow the Bank of England will disclose the outcome of one of the most eagerly anticipated interest rate decisions of recent years. According to The Times’ panel of economists, now is the moment to act.
With worries about inflation on the rise, eight of the nine members of The Times’ shadow monetary policy committee believe that the Bank should increase rates from their record low of 0.1 per cent for the first rise since August 2018.
Financial markets are anticipating an increase and suggest a 63 per cent probability of a 15-basis-point rise to 0.25 per cent. Yet while the Bank’s rate-setting MPC was unanimous in September in deciding to keep rates unchanged, there is scope for divisions to emerge this time. Recent comments from committee members, including Andrew Bailey, the Bank’s governor, have indicated that some, though not all, may be in favour of tightening policy.
Although the stance of the shadow panel is not unanimous, a significant majority were in favour of tightening. Seven members voted for a rise to 0.25 per cent, while an eighth, Bronwyn Curtis, recommended a 25-basis-point rise.
Andrew Sentance, a former Bank MPC member, called for “a clear statement that the MPC will continue to raise rates in 2022 to bring them into the 1 per cent to 2 per cent range by the second half of the year”.
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A central issue for policymakers is whether the rise in inflation is likely to be temporary or persistent. The consumer prices index slipped to 3.1 per cent last month, from 3.2 per cent in August. Last week the Office for Budget Responsibility said that it expected headline inflation to peak at 4.4 per cent next year, pushed higher by surging energy prices, before falling back to 2 per cent in 2024. It modelled one scenario, however, in which inflation reached 5.4 per cent and then retreated more slowly.
Karen Ward, chief European market strategist at JP Morgan Asset Management, who sits on the shadow panel, said that the inflation rise would not be transitory. “I’d rather they raised pre-emptively and slowly than leave too late and have to raise rates more sharply,” she said.
Sir John Gieve, a former deputy governor of the Bank, agreed. “Inflation has and is expected to stay high for a prolonged period,” he said. “The risk that this sets a new baseline or starts a spiral of wages and prices is real and has been increased by the budget and the statements on pay increases.”
Other members of the shadow committee believed that last week’s budget, which included a rise to the national living wage, an end to the recent public sector pay freeze and an £150 billion increase in government spending, should have a bearing on this week’s decision.
Charles Goodhart, another former ratesetter, said: “Since the budget was mainly about extra expenditures, if anything it would strengthen the argument for starting to move interest rates.” He voted for rates to be lifted to 0.25 per cent, as did Sir Steve Robson, a former Treasury official, who said that the budget had “given quite a lot of money to an unreformed public sector. This will tend to add to wage and other inflationary pressures.
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“Inflation is already high. In addition we have a government with a central economic policy of promoting high wages based on a belief that this begets high productivity. Did I miss the productivity miracle of the 1970s? In the UK high wages begets high inflation, especially if monetary policy is highly accommodating, as it is.”
Anne Sibert, professor of economics at Birkbeck, University of London, said it was time “to make it clear that the MPC is prepared to raise the rate as needed to restrain inflation”.
Rain Newton-Smith, chief economist at the CBI, the employers’ group, said that businesses were “increasingly concerned about rising inflation”.
Curtis, a non-executive director at the OBR, argued the case for a 25-basis-point increase this month. “The bank rate will have to go up, so why wait?” she said.
Yet holding off is exactly what Martin Weale, another former ratesetter, voted for, instead calling for an immediate end to the Bank’s quantitative easing programme.
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“Later this month the impact of ending furlough will appear in the data and there is little to be lost by waiting, given there is a meeting in December,” he said.
