The MPC is on the verge, but a hike would be a mistake

摘要

In light of the MPC's recent signalling, we now think that November's meeting will deliver a 25 basis points rise in Bank Rate. But the case for tighter monetary policy is weak even by the Committee's own criteria. This article sets out six reasons why we think that the MPC is on the verge of making an error. A chorus of hawkish comments from MPC members suggests that the Committee's next meeting on 2 November will announce a rise in Bank Rate, a 10-year first. Granted, the MPC has ‘cried wolf’ before. But this time around the rhetoric has been much stronger. And the Committee has set the bar for a hike very low. Moreover, with inflation likely to peak soon and then decline through 2018, November would offer a good opportunity, presentationally at least, to go for a hike. But caution should temper the Committee. The MPC cites “a continued erosion of slack and a gradual rise in underlying inflationary pressure” in support of its view. However, while the unemployment rate has fallen below the Bank's ‘equilibrium’ estimate, the Bank has history in being compelled to progressively cut that estimate. With the jobless rate still well above post-war lows and worker power cowed, joblessness could fall further without threatening inflation. Meanwhile, the rise in underlying inflationary pressure that should follow from diminishing slack is absent. The MPC's claim that pay growth is picking up is tenuous and conflicts with recent survey evidence from the Bank's own regional Agents. In any case, the idea that faster pay growth threatens higher inflation has surprisingly weak foundations. Admittedly, a small rate rise, in itself, would slow growth only modestly. But the message sent by such an action risks pushing the economy further into a low growth expectations trap. And the Bank has alternative tools for dealing with the adverse side-effects of ultra-low rates. A rate rise in November would be a mistake.