• Today’s decision by the Monetary Policy Committee to leave interest rates unchanged at 5.25% is a short stay of execution as it is extremely likely that interest rates will be raised to 5.5% next month. And interest rates may have to rise further thereafter.
• Admittedly, the immediate inflation outlook has improved in recent months. Although CPI inflation remained high at 2.8% in February, the recently announced cuts in gas and electricity prices that start to take effect this month will drag inflation back below the 2% target rate by the summer.
• What’s more, the MPC appears to have become less concerned about the threat of a significant rise in wages growth. Indeed, although pay settlements rose from 3.0% in December to 3.5% in January, and stayed there in February, the Committee recently stated that this was considered a “modest” increase relative to the large rise in inflation seen over the last year.
• But there has been little evidence that the three interest rates rises seen since the summer have started to affect economic activity or underlying inflationary pressures. The number of new mortgage approvals held steady at 119,000 in February, well above the long-run average of around 100,000, while house price inflation continues to hover around 10%. Meanwhile, annual retail sales growth increased to 4.9% in February.
• And perhaps more importantly, the Committee has become increasingly worried about the recent rise in firms’ pricing intentions that could result in higher inflation in the medium-term. Indeed, the increase in the CBI’s manufacturing price expectations balance to a 12 year high in March suggests that firms have become more confident in their ability to make price increases stick.
• Moreover, some members of the Committee are still concerned that the rapid rates of money supply growth and the high level of asset prices will eventually spill over into a sustained rise in price pressures further ahead.
• Accordingly, I think that interest rates are odds-on to rise in May. And it is perfectly plausible that this hike will be followed by another a few months later. At the very least, the risk of such an event will linger for some time, even as CPI inflation falls sharply.
• My best guess, though, is that one more interest rate rise will do the job. With a US economic slowdown likely to result in more sluggish UK GDP growth than the MPC expects, interest rates are likely to start falling some time early next year.

Roger Bootle is Economic Adviser to Deloitte.

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.

This press release contains general information only and is not intended to be comprehensive nor to provide professional advice.  It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business.  Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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