Will the Bank of England raise interest rates on Thursday? The Bank’s chief economist Huw Pill said recently that the decision is “finely balanced”.
What might be more likely that a rate rise would be some scaling back of quantitative easing: whereas the MPC voted unanimously to keep rates unchanged in September, two members voted then to cut QE and evidence since then probably isn’t so compelling as to cause many members to change their mind.
Purchasing managers’ final reports will, though, show one reason for them to do so. These should confirm the flash readings which showed firms reporting big rises in costs.
Inflation isn’t confined to raw materials, however. We’ve also seen it in the housing market. Here, though, next week might bring evidence of a slight cooling off. The Halifax could report that annual inflation has dropped to around 7 per cent from 9.6 per cent in May, due in part to the end of the stamp duty holiday. The Bank does not, though, target this measure of inflation.
The eurozone, meanwhile, could report weaker activity. Purchasing managers are likely to confirm that growth is slowing thanks in part to shortages and rising costs. And other evidence will confirm the weakness of the region. Although German industrial production should show a rise after August’s slump, output will still be lower than it was in the winter and well below pre-pandemic levels which themselves were down on two years previously. And while retail sales for the region should show a slight rise, these will be lower than they were in May and June. All this matters for the UK’s interest rate decision as the region remains our biggest trading partner, so weak demand there spills over to here.
We’ll also get a monetary policy decision from the Fed next week. It might ease back slightly on quantitative easing, as it warned it could at its last meeting. It will probably, though, repeat its promise to keep the Fed funds rate around zero until the economy has reached “maximum employment.” Friday’s figures will show that despite rising employment last month, it is still some way from this point. The unemployment rate, at around 4.5 per cent, will be a full percentage point above pre-pandemic levels. And the ratio of employment to population, at around 59 per cent, will be two percentage points below 2019’s level.
There will, though, be evidence of rising wages: average hourly earnings could be some 4.6 per cent up on a year ago, a rate well above pre-pandemic rates. This tells us that the pandemic has created mismatches between labour demand and supply – but these should ease in the next few months.
