• The Monetary Policy Committee today left interest rates at 4.5% for the eleventh month in a row, making this the joint second longest period of inactivity in its history. But whereas the markets think that the Committee is champing at the bit to raise interest rates, I believe that they will probably remain on hold for the rest of the year.
• Admittedly, the tone of the economic data released over the last month has been fairly strong. The National Accounts revised the quarterly rate of Q1 GDP growth up from 0.6% to 0.7% while the annual growth rate was nudged up from 2.2% to 2.3%.
• However, the MPC has insisted for some time that the official data might be underestimating the true strength of the economy, so these changes may simply confirm what it already expected. And the Committee has responded to similar changes in the past by taking the view that, with the path of inflation unaltered, the revisions indicate that there has been more spare capacity in the economy than previously thought.
• Some concern has been expressed over the rise in CPI inflation from 2.0% in April to 2.2% in May. But with the core rate of inflation having fallen from 1.3% to 1.1%, underlying inflation pressures remain benign. Indeed, there is still little evidence of any second-round inflation effects, with the Bank of England’s measure of household inflation expectations falling from 2.7% to 2.5% in Q2 and headline average earnings growth (excluding bonuses) easing from 3.8% to 3.7% in April.
• One clear upside risk is the strength of the housing market. The latest data showed that activity remains reasonably strong, with the number of new mortgage approvals reversing most of the recent fall by rising from 106,000 in March to 117,000 in April. Even so, the latest news on prices has been relatively soft, with the Halifax index falling by 1.2% in June.
• And downward risks remain too. The recent rise in unemployment may reduce consumer confidence – even though it has been driven by a rising workforce rather than outright job losses – prompting consumer spending growth to remain below its long-term average.
• Accordingly, with the economy looking fairly balanced, I think that the MPC will be reluctant to raise interest rates in the next few months. What’s more, if I am right in expecting a marked slowdown in the US economy next year, it is still perfectly plausible that the next rate move in the UK will be down.

Ends

Notes to editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte.  If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or via email on business@capitaleconomics.com.

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