Market participants continue to push back their interest-rate hike expectations, despite the UK's economic growth reaching pre-crisis levels last year, and the jobless rate falling in February to its lowest level since the summer of 2008.
Consequently, a majority of Bank of England (BoE) policymakers expect a rate hike in the near future, unlike BoE chief economist Andrew Haldane, who said on March 19 that "if a move in rates was required, given the current inflation risks, the chances of a rate rise or cut would be broadly evenly balanced." Haldane also added it was his own interpretation, rather than the Monetary Policy Committee's (MPC) central view.
Haldane thus revealed himself as the one who, at the February meeting of the MPC, thought "the next change in the stance of monetary policy was roughly as likely to be a loosening as a tightening."
Still, there is a majority of those at the MPC who think rates should go up rather than down.
Speaking to Financial Times on March 25, BoE policymaker David Miles said there were no signs of a downward spiral in prices, despite the current inflation rate dropping to zero for the first time ever on record.
"It’s wise to hold your nerve and not to get panicked into a response to the current [0%] rate ... What I don’t see at the moment is persistent underlying deflationary pressures in the UK," Miles said. "It is more likely than not that the next move will be up. Quite when that will come will depend on how the data play out," Miles said.
"I can certainly imagine a situation where inflation is under the target level perhaps by a significant amount and the right strategy would be gradually to start a process of normalization and edging [interest rates] up — that’s not by any means a low probability event," Miles added.
The latest official data showed the rate of CPI inflation remained stable in March at 0%, despite some expecting a fall below zero. Petrol prices have continued to rise steadily both in March and April, so there is a possibility the UK could eventually avoid the awaited deflation blip in the coming months.
Even so, economists expect inflation to remain significantly subdued over the rest of this year, averaging at 0.1%. Therefore, arguing for a rate hike in the upcoming months, while upward price pressures remain significantly meager, would be more or less embarrassing even for the most hawkish members at the MPC.
The BoE made the case for a rate hike even more distant in March, when it revised down its outlook for medium-term inflation. In its March MPC minutes, the policymakers judged that deflationary forces might become more persistent, driven by the risk that divergent monetary policy trends, as well as stronger prospects for growth in the UK than in the euro area, might continue to put upward pressure on sterling's exchange rate, primarily versus the euro.
The BoE policymakers will report on their updated outlook for inflation, economic growth, and the labor market on May 13, as part of the regular quarterly Inflation Report.
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