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Harder for Bank of England to justify further rate rises – Oxford Economics

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  • 03/08/2018
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Harder for Bank of England to justify further rate rises – Oxford Economics
The Bank of England (BoE) Monetary Policy Committee (MPC) will find it hard to justify making a further interest rate rise in the next year, according to Oxford Economics.

 

In a highly critical statement, the firm also argued there appeared to be a predetermined strategy to gradually tighten monetary policy with limited evidence to support it.

It noted: “With the pace of growth tepid, at best, the current MPC is tightening policy against a far weaker backdrop than its predecessors had in previous cycles.

“Thus far, the committee has used a revolving cast of indicators to try and justify its long-held view that a tighter labour market will drive up wages and inflation.

“But we remain sceptical and expect inflation to drop back below target by early-2019. This is likely to mean a maximum of one rate hike next year,” it added.

 

Predetermined strategy

Although yesterday’s increase of 0.25% to the bank’s base rate was supported by the Confederation of British Industry, it was strongly criticised by the Institute of Directors and British Chambers of Commerce.

Oxford Economics lead UK economist Andrew Goodwin joined this disapproval.

“It is difficult to get away from the idea that the MPC has a predetermined strategy to gradually tighten policy unless, as in May, the data flow precludes it,” he said.

“This is presumably aimed at giving itself more room to loosen policy in the next slowdown, though this an idea with which we have little truck.

“Certainly there has been little in the data to suggest that the economy needs a rate hike,” he added.

 

Maximum of one rise

Goodwin also criticised the MPC for being focused on a forward-looking narrative which believes that a tighter labour market will inevitably drive up wages and inflation.

“In our view, the data has offered scant backing to this idea thus far, with the MPC having to rely on revolving cast of second-tier indicators to try and justify the call, the latest of which was its own survey of regional agents,” Goodwin said.

“We remain deeply sceptical that the wage response will be as strong as the MPC anticipates and, given the prospect of powerful downward base effects in H2 2018 and H1 2019, we think it likely that inflation will move some way below the 2% target over the next 12 months.

“Against this backdrop, it will become ever harder to justify further tightening and we expect a maximum of one rate hike in 2019. Indeed, given concerns around the durability of global growth and uncertainty around Brexit, it would not be difficult to envisage the MPC sitting on its hands throughout next year,” he added.

 

 

 

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