Business

DEBATE: Should weaker inflation stop the Bank of England raising rates?

Should the weaker inflation figures stop the Bank of England from raising rates next month?

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says YES.

Inflations rapid fall to 2.5 per cent in March – well below the MPCs 2.8 per cent forecast – from 3.0 per cent at the start of this year should ring alarm bells on Threadneedle Street.

The monetary policy committee (MPC) has misjudged how quickly inflation would rise and then fall back in response to sterlings 2016 depreciation. Sterlings newfound strength suggests that the inflation rate for core goods will keep falling, reducing the headline rate to 2.0 per cent by the end of this year.

Domestically-generated inflation, meanwhile, remains dormant. Services inflation was just 2.5 per cent in March, and on its current trend it wont reach its 3.5 per cent pre-recession norm, required for at-target headline inflation, for another three years.

In addition, annualised three-month on three-month growth in basic wages – a favourite MPC metric – fell to a 10-month low in February. Subdued inflation means that the MPC should be cautious and wait for confirmation that the likely slowdown in GDP growth in the first quarter was just a weather-related blip, rather than a more fundamental malaise.

Read more: Inflation falls steeply: Here's what economists think the BoE will do

Yael Selfin, chief economist at KPMG, says NO.

While the inflationary pressures triggered by the fall in sterling following the EU referendum are gradually dissipating, other pressures are coming to the fore. A strong external economic environment is likely to continue to exercise upward pressure on the price of some commodities, as well as on the price of other imports.

At the same time, better economic prospects elsewhere could make it harder for UK businesses to attract and retain labour from overseas.

Figures released earlier this week showed that UK unemployment fell to only 4.2 per cent at the start of the year, while earnings growth is approaching its “equilibrium rate”. Unless we see a significant turnaround in productivity performance, the UK economy may soon be left with no spare capacity.

The significant fall in inflation since the start of 2018 is therefore unlikely to be repeated in the short term, and the Bank of England should follow up its earlier signal that a rate rise is due in May.

Read more: Headache for Bank of England as inflation falls to lowest in a year

[contf] [contfnew]

CityAM

[contfnewc] [contfnewc]

Leave a Reply