The Bank of England’s Monetary Policy Committee (MPC) voted to keep Bank Rate unchanged at 0.5% at its March meeting. But with two members of the nine person committee - Ian McCafferty and Michael Saunders - dissenting by voting for a hike to 0.75% the prospect of a further increase in Bank Rate the near term seems increasingly likely.
In terms of timing the most likely point in the coming months for the next hike in Bank Rate is May, when the Bank of England will present its latest outlook for inflation in the UK.
The prospect of a further rise in markets hit the already jittery equity market with share prices this week continuing the downward trend seen since January. By contrast the prospect of higher rates pushing up the value of the pound on the foreign exchange markets – a factor that further hits the FTSE-100 equity index given that so many of the constituent companies make a substantial proportion of their earnings in non-sterling currencies. A stronger pound deflates the sterling value of these non-sterling earnings.
The question has to be asked, though, as to whether a tighter monetary policy is really needed. Price inflation has been rising in recent months but the latest data for February show the Consumer Prices Index (CPI) rate of inflation falling to 2.7%. A stronger pound will also help keep the price of imports down as well. Sure earnings inflation is picking up, putting cost pressures on businesses. But the pick-up is only modest to 2.6% annually.
Perhaps some members of the MPC feel that current economic conditions warrant more ‘normal’ interest rate levels? Since the 2007/08 financial crisis interest rates have indeed been at an abnormal (and historic) low. Returning them to the 2%-4% range in the coming years may be perceived as signalling the return of normality to the UK economy!
One group - the beleaguered savers in the UK – would certainly welcome a return to such normality. The chances are, though, that with inflation remaining low normality is not around the corner – we may still have to wait several years for it to return!
Martin Upton
Director, True Potential PUFin
23rd March 2018
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