Earlier today, as expected, the MPC voted to keep interest rates on hold at 0.5%.
There was however a surprise in the voting, with the the Bank’s chief economist, Andy Haldane, joining Ian McCafferty and Michael Saunders in voting for a 0.25% rise. This is the first time that Andy Haldane has ever dissented from Governor Mark Carney, and the 6-3 vote has raised market expectations of a rate rise in August. Indeed, Sterling jumped on the back of this prospect.
The split in votes broadly came down to those who believed that the recent data showed that the weakness in q1 was temporary (hawks), and those that wanted to wait and see how the data evolved in the coming months to be sure (doves).
So what are the factors that could lead to a rate rise in August?
Reasons for a rate rise in August:
- Production data, after a weak April, bounces back in May. The Bank put much of the weakness in April’s production data down to involuntary stock building in q1. With surveys of business activity (including our own Manufacturing Outlook) looking stable on the whole, they expect output to rebound and push up growth in q2.
- Rising oil price and a weaker Sterling exchange rate keep inflation above target.
- Wage growth continues to firm, as slack in the labour market continues to diminish.
- Household spending and sentiment continues to improve – building on the healthy services PMI reading and strong retail sales data.
Reasons not for a rate rise in August:
- Production data doesn’t bounce back as expected. The Bank has placed a lot of emphasis on increased stock building being behind the weakness in q1, but there is a general sense that momentum in the manufacturing sector is easing, with some of the key drivers of activity last year - including a resurgent global economy, Sterling depreciation and boost in global business investment - all fading.
- Wage growth again comes under expectations.
We believe that the case for a rate rise is not as strong as markets in the immediate aftermath of the decision are implying. The majority of MPC members will at the very least want confirmation that the weak first quarter growth figure was just a blip.
The issue with this being that there isn’t much more data between now and the August meeting to do this. The new way the ONS is measuring GDP means the only real data points of note between now and then are production, inflation and labour market data.
Nevertheless will be following these closely in the hope of getting a steer on the possible outcome on the 2nd August.