Interest rate-setters split ahead of key Bank of England meet

Wage growth and GDP figures released this week have highlighted the delicate balancing act facing the Bank of England’s monetary policy committee (MPC) ahead of its September meeting.

Figures released on Wednesday showed that monthly GDP shrank by 0.5 per cent in July, as the impact of wet weather and strikes dragged on growth. Following the release, Yael Selfin, chief economist at KPMG UK, said the UK economy could "struggle to keep its head above water in the remainder of the year” given weakening global economic conditions alongside a lagged impact of higher interest rates. The figures did not take account of the upward revisions announced by the ONS earlier this month.

Yet, persistent inflationary pressures remain a concern. The committee is particularly troubled by high rates of wage growth, which outstripped inflation again this month. Labour market data released on Tuesday showed that weekly earnings growth (excluding bonuses) held steady at 7.8 per cent, while private sector wage growth eased only slightly from 8.2 per cent to 8.1 per cent. Job vacancies, however, dipped and the unemployment rate rose from 4.2 to 4.3 per cent. 

Economists are divided on whether this represents a convincing loosening of the UK’s tight labour market. Kitty Ussher, chief economist at the Institute of Directors, said private sector pay wage pressure has eased and was likely to fall further. She added that it was time for the BoE to "keep interest rates on hold" when it meets on 21 September.

However, Ashley Webb, UK economist at Capital Economics, said the strong wage growth suggested the Bank will raise rates further. He expects a 0.25 percentage point hike next week, taking the rate to 5.5 per cent. Market pricing currently implies an almost 80 per cent chance of a hike next week, though traders are split on the chances of another rate increase later in the year.

With data providing something for both doves and hawks, the same debate will play out between the nine MPC members. In early September, governor Andrew Bailey told MPs that “we are much nearer to the top of the cycle”, while chief economist, Huw Pill said he would favour a “resolute profile [of interest rates] rather than a spike profile”. These comments were interpreted to mean rates would stay close to current levels. 

But on 11 September, rate-setter Catherine Mann said that she would rather “err on the side of over-tightening” than risk high inflation becoming embedded in the economy. She added that the Bank needed to act on its commitment “to do what is necessary to achieve the 2 per cent target, sooner rather than later”.