A former member of the Bank of England’s Monetary Policy Committee says its credibility will be further undermined if it puts off another rate riseby Andrew Sentance / May 9, 2018 / Leave a comment
The Bank of England Monetary Policy Committee (MPC) will consider tomorrow at its May meeting whether to raise the official UK Bank Rate to over 0.5 per cent for the first time since March 2009. The short-term indicators on growth and inflation present a mixed picture. GDP rose by just 0.1 percent in the first quarter of this year, though economic activity was quite significantly affected by wintry weather—hitting both construction output and retail sales. CPI inflation has fallen back to 2.5 percent, a slightly bigger short-term drop than the Bank of England was expecting.
Labour market indicators, however, continue to be positive. The unemployment rate has fallen to 4.2 percent—the lowest rate recorded since the mid-1970s. The number of unfilled job vacancies has hit a new high, with one vacant job for every 1.7 unemployed people, down from a ratio of 2.3 just two years ago. Pay growth has picked up to 2.8 per cent, which compares to an average rate of wage increases of 1.8 percent since the recovery started in mid-2009.
Another positive ingredient in the current economic picture is the growth of the world economy. We are in the strongest sustained phase of world economic growth since the financial crisis. The IMF is forecasting increases in global GDP of nearly 4 per cent both this year and next. All the three main regional engines of the world economy—North America, Europe and Asia—are growing well and providing a healthy backdrop for UK export growth. A very good barometer of global economic activity is air travel. The latest figures from the International Air Traffic Association (IATA) show that passenger traffic worldwide is nearly 10 percent up on a year ago, close to double the longer-term average rate of increase.
A negative factor in the short-term economic mix is the potential impact of Brexit uncertainty, which has undoubtedly held back UK growth in the past couple of years and pushed us to the bottom of the G7 growth league. Governor Mark Carney mentioned this issue explicitly a few weeks ago as a reason why the MPC might postpone a May rate rise which the markets had been expecting. But Brexit uncertainty has been with us in various forms for over two years now. It is not obviously a bigger factor now than a few months ago when MPC members were hinting strongly that a May rate rise would be on the cards.