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Tomorrow the Bank of England’s Monetary Policy Committee is widely expected to raise interest rates for only the second time since the financial crisis, taking borrowing costs to their highest level in almost a decade (0.75%). However in our opinion, and given the mixed bag of data since the last meeting, this is not a foregone conclusion and any decision remains finely balanced.

With that in mind we’ve taken a look at the key data points which are likely to effect MPC members thinking.

These are illustrated in detail in the attached slide deck.

 

 

1) Inflation

The MPC’s primary objective is to keep prices in check at the 2% mark. The collapse in Sterling in the aftermath of the referendum saw inflation rise over the course of the year, peaking at 3.1% in November. Since then however, the Sterling depreciation effect has faded a lot quicker than expected, bringing prices down, with the latest CPI reading at 2.4%. Despite the rise in oil prices, inflation is forecasted to be back around the 2% mark by the end of the year.

Verdict: No rate rise

 

2) Economy’s performance

Recent data appear to confirm that the economy’s weak performance in q1 was a blip as a result of the “Beast from the East”.

 

“The incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate”.

Mark Carney, 5th July

Indeed the economy is expected to pick up and expand by 0.4% when q2 data is released next week, with the services sector in particular performing well.

That said 0.4% growth is nothing to write home about, and with consumer confidence still languishing, retail sales in June weak, today’s manufacturing PMI again painting a subdued picture, and the outcome of Brexit still shrouded in uncertainty, a strong case can be made for holding rates for the time being.  

Verdict: On a knife edge

  

3) Labour market

The labour market has continued to be a source of good news for the economy, with the employment rate hitting a succession of historical highs in recent months, and the unemployment rate down at 4.2%.

While there is likely to be some slack left in the economy, a tight labour market – further boosted by the recent fall in EU migrant labour - will surely start to result in wage increases…right?

Verdict: Rate rise

 

4) Earnings

…well maybe not. This is perhaps the data point which has put tomorrow’s decisions into most doubt. After some steady increases this year, wage growth stuttered in May, with official and private survey data easing. We are not sure where further wage pressures are going to come from this year, given that the labour market has been performing well for so long. It continues to puzzle economists and defy traditional economic theory. 

Verdict: No rate rise

 

5) Reliability

Mark Carney’s “unreliable boyfriend” tag is not particularly true or fair. Nevertheless, having stated in May that the MPC wanted to wait and see if the poor performance in q1 was a blip – and it now more or less being confirmed – the Bank will be keen to keep action in line with previous communications. We have been here before however…

Verdict: Rate rise

 

August-MPC-preview

As we said at the outset of this blog, this is not a clear decision. Stay tuned for our blog on Thursday where Lee will be analysing the implications of the decision, as well as the Bank’s updated growth forecasts published in the Inflation Report.

 

Author

Economist

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Week ahead 13th August

13 Aug 2018

Our regular weekly look ahead at upcoming data releases

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