The Bank of England’s Monetary Policy Committee (MPC) is set to meet this week to discuss interest rates, with markets generally expecting them to be left unchanged. According to City AM, officials will be faced with new challenges in getting inflation down to two per cent, as well as old ones.
One of the newest shocks to rock the global economy and worry even the most dovish MPC members is the risk of an upturn in energy prices following an exchange of strikes between Israel and Iran, threatening the Strait of Hormuz, the only sea passage from the Persian Gulf to the open ocean. City AM reports that its potential closure could force the price of oil to jump to $130 a barrel from the current Brent Crude price level of around $73, according to Oxford Economics, risking a deterioration in inflation.
The source also notes that rate-setters who dealt with the effects of the war in Ukraine and the alienation of Russia from global trade may feel well-equipped to respond to the latest energy market turmoil caused by yet another conflict. However, Bank officials will also be looking beyond British shores to low spirits in the US economy, the vulnerability of financial markets, and treatments in deals struck by the likes of China and the European Union with President Trump after the UK got a partial tariff reduction on car exports and food trade.
As City AM reports, the widely-agreed prediction that Trump’s tariffs would weigh down on price growth due to trade diversion and hampered global demand is being tested in real-time. Deputy governors Sarah Breeden and Clare Lombardelli were among those to warn that tariffs could lead to an upswing in goods prices due to supply chain disruptions.
The source also highlights that perhaps what keeps Bank officials awake at night the most is the bleak local picture. Most MPC members, including chief economist Huw Pill and Governor Andrew Bailey, have warned that wage growth has been too strong for monetarists’ liking and consistently punched above Bank projections.
According to City AM, Chancellor Reeves’ national insurance taxes on employers and hike to the national living wage announced in last year’s budget are still being processed by firms, with many claiming they would raise prices further in the coming months. Despite questions hanging over the Office for National Statistics (ONS)’s flagship labour force survey, the official data body revealed unemployment had crept up to 4.6 per cent as the number of payrolled employees had dropped by 274,000 over the last year.
The source notes that inflation has remained high, with April showing a year-on-year rise of 3.4 per cent in prices – despite an error by the ONS showing the rate had hit 3.5 per cent. Data to be published on Wednesday morning is expected to show price growth of 3.3 per cent in the 12 months to May.
City AM also reports that economists are not holding out for any real change in policy approach after Pill’s speech at Barclays calling for more moderation. While Bailey has complained about the unpredictability of policies conducted by international governments, it is the unpredictability of some MPC members – namely Catherine Mann and Huw Pill – that will keep Bank watchers on edge this week.
The source quotes Vicky Pryce, a veteran Centre for Economics and Business Research economist, as saying: “Even if inflation is somewhat elevated, this is likely, bar a new energy shock, to be temporary and rates therefore too high for sustainable improvement in activity, particularly for smaller firms.”
Ruth Gregory of Capital Economics, who would vote for Bank Rate to remain at 4.25 per cent, suggested that high wage growth and a rise in oil prices should encourage rate-setters to hold off from voting to loosen policy. As City AM reports, Gregory added: “Another 25 basis point interest rate cut in August is a growing certainty… The weakening in the jobs market is gathering pace. And it is probably only a matter of time before wage growth slows to rates consistent with the two per cent inflation target.”
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