Tomorrow’s Bank of England rate decision takes place amid rising inflation and increased political tension following last Thursday’s general election.
While the Bank is expected to leave rates on hold at at 0.25 per cent, the clamour for the Bank to act after inflation hit 2.9 per cent this week is growing ever louder.
Adding to Governor Mark Carney and his colleagues’ woes was fresh data today showing UK wages grew at their slowest pace in 2 years.
Hard or soft: Brexit is unlikely to be a smooth process and this presents a problem for Carney.
Neil Wilson, at ETX Capital, said: ‘Today’s pay data confirms the squeeze on real wages is getting worse and this poses real questions for the Bank of England. How long can it look through the overshoot in inflation before it has to raise rates?’
‘It poses a headache for the MPC. A quarter point hike may be proportionate to offset the worst of the inflation and help support the pound.’
‘Given the drop in real wages there is certainly more pressure on the Bank to act as low rates start to look like they might be adding to the problem, not tackling it. It would not be a surprise if one or two members of the MPC vote for a quarter-point increase to the bank base rate this week,’ Wilson added.
The Bank has so far resisted calls for action, arguing that raising interest rates could kill off limited UK economic growth.
The argument makes sense, but recent stats shows the professional economists which make up the Old Lady’s policy committee have grossly misread inflation for the year ahead.
In its inflation report in May it forecast inflation of 2.65 per cent in the second quarter and for it to peak at 2.82 per cent by the end of 2017.
Blanchflower was an external member of the Bank of England’s interest rate-setting Monetary Policy Committee from June 2006 to June 2009.
Just one month after the report was published and ONS data shows inflation has already overshot, raising questions about how much longer the Bank will stick to its line about ‘tolerating’ higher prices.
The Bank’s predictions were made on the condition of a smooth Brexit, something which now looks off the cards regardless of whether the country opts for a ‘hard’ or ‘soft’ option.
But one member who has correctly predicted inflation is Kristin Forbes.
Back in February, the external member of the Bank’s Monetary Policy Committee, warned that inflation was starting to pick up faster than expected.
Contrarian: Forbes has been outspoken about inflation and her warnings have come true.
As a result she has been the only member of the Bank of England’s monetary policy committee who voted in favour of higher interest rates. Forbes cast the sole vote for an increase at the previous two meetings.
Perhaps Forbes will break away from the pack again given that it is her last monetary policy meeting.
Forbes leaves the Bank in June to return to academia, with a replacement likely to be announced before August.
The bank is expected to make a statement tomorrow when it releases its policy decision.