- UK inflation remains high by international standards
- A review in to Bank of England forecasting has been announced
Economists remain split on whether Bank of England policymakers will deliver another ‘double’ interest rate hike in their crucial policy meeting on Thursday.
Last month, the monetary policy committee surprised markets with a 0.5 percentage point increase, taking the Bank Rate to 5 per cent. More positive inflation figures since assured some investors the committee could revert back to its preferred 0.25 point increase, but others remain unconvinced.
Just weeks ago, markets expected UK interest rates to peak at 6.5 per cent early next year. This then fell to be between 5.75 and 6 per cent following the inflation surprise, with most traders expecting the BoE to fall in line with the Federal Reserve and the European Central Bank, and go back to its preferred 0.25 point increase.
Yet economists have cautioned that the UK’s inflation picture remained challenging by international standards. Ruth Gregory, deputy chief UK economist at Capital Economics, noted earlier that the 4.8 percentage point gap between UK and US CPI inflation [which was 3.1 per cent in June] was still growing. Even though UK inflation is falling, it remained significantly higher and is falling at a slower rate, than the eurozone and the US.
Capital Economics said the most likely outcome was for policymakers to raise the interest rate from 5 per cent to 5.25 per cent on Thursday, but analysts said there was a “clear chance” of another double hike.
Economists at Investec said they expected the BoE to opt for another 0.5 point increase, noting that “concern over sticky services prices inflation and persistent private sector regular wage growth would on balance lead the majority on the MPC to vote to do more now”. They added that if a larger hike “does prove to be too much, it can be always undone at a later date”.
Crucially, Thursday’s interest rate decision will be accompanied by the Bank’s updated economic forecasts. Barclays analysts – who also anticipate a 0.5 point hike – expect that the new forecasts would "explicitly incorporate more inflationary persistence, to justify the forceful action we expect”.
On Friday, it was announced that US economist Ben Bernanke would lead a review into forecasting at the BoE. The Bank has previously faced criticism for its forecasting, and governor Andrew Bailey has admitted that models have struggled to account for high and persistent inflation. The review will look at the design and use of forecasts and their role in policymaking “in light of major economic shocks”.
