Economics for June


Although interest rates were left unchanged following the Monetary Policy Committee (MPC) meeting on 20 June, an additional dissenting voice has increased the likelihood of a rate rise at the next meeting in August.

The Bank of England (BoE) left interest rates on hold last month but by a narrower than expected margin after the central bank’s Chief Economist, Andrew Haldane, unexpectedly joined the minority of policymakers voting to raise rates to 0.75%. This left the nine-member MPC split 6-3 in favour of holding rates at their current level of 0.5%.

Rates were increased last November for the first time since the financial crisis, and the MPC had looked set to sanction a second rise in May, until the release of weaker than expected first quarter economic growth figures. However, minutes from the latest meeting suggest the MPC expects the poor early-year growth to prove “temporary” and that the pace of growth is likely to have picked up during the second quarter of the year.

While some members of the MPC, including BoE Governor Mark Carney, have previously cited Brexit uncertainties as a key reason not to increase rates too soon, Haldane’s decision to back an immediate rise appears to have altered the Committee’s equilibrium. And this has certainly increased the chances of a hike when the MPC next convenes in early August, particularly if the expected pick-up in growth is confirmed during the intervening weeks.
However, the minutes from the June meeting also reiterated that any future monetary tightening is likely to be “at a gradual pace and to a limited extent”. So, while the odds on a summer rate rise have shortened, it is unlikely to signify an imminent end to the low interest rate environment that has characterised the UK economy for the past decade.

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