Chart of the Week: BoE’s MPC doubles down, but a rate hike in May is not nailed on

Long before it became fashionable, Fathom Consulting pointed to low interest rates as the reason for the UK’s dire productivity performance, arguing that ‘too low for too long’ was damaging the supply side by preventing the gales of creative destruction. With that in mind, we welcome last Thursday’s signal from the UK’s MPC that it intends to tighten in the coming months, an impression enhanced by both Ian McCafferty and Michael Saunders voting for an immediate 25 basis point increase. But as we explained to clients last week, a rate hike at the Committee’s next meeting in May is not nailed on, and even if a hike does occur, it is unlikely to mark the start of a tightening cycle.

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Indeed, as confirmed by the Minutes, the latest economic indicators have been mixed and weather poor, causing Bank staff to revise down the estimate of 2018 Q1 GDP growth to 0.3%. That is far lower than the average rate (0.8%) reported at the time of past rate rises. And although Ian McCafferty and Michael Saunders were some of the first to break rank last year, voting for a rate rise with a majority forming behind them several meetings later in November 2017, that is far from always the case. If we are right, and economic activity slows to below the pace that the MPC regards as the ‘speed limit’, the next monetary policy decision in May is likely to be a close call. Contrary to the consensus, our central view is that the MPC will not hike; but if it does, it is unlikely to mark the second of many.

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