Shadow Committee Recommends Interest Rate Hold as Inflation Concerns Persist
The Bank of England has received a clear recommendation from City AM's Shadow Monetary Policy Committee to maintain interest rates at their current level of 3.75 per cent. The influential panel of nine independent economists has urged policymakers to exercise caution, arguing that insufficient evidence exists to justify lowering borrowing costs despite some encouraging signs in recent economic data.
Economists Advocate for Prudent Approach
In a decisive 7-2 vote, the majority of Shadow MPC members advocated for holding rates steady, warning that business survey data indicates persistent cost pressures and insufficient momentum decline in the UK economy to warrant immediate reductions. This recommendation comes as markets have largely priced in expectations that the Bank will maintain current rates during its upcoming Thursday meeting.
Recent inflation figures showed the rate standing at 3.4 per cent for the year to December, still significantly above the Bank's two per cent target. Several committee members expressed particular concern about services and food inflation, both hovering around five per cent in the most recent data releases.
Diverging Views Within the Committee
While the majority favoured maintaining current rates, two economists dissented, advocating for a 25 basis point reduction. Kallum Pickering, chief economist at Peel Hunt, argued that economic fundamentals have turned "decidedly disinflationary" with soft demand growth, loosening labour markets, and private wage gains now "comfortably in the safe zone."
Similarly, Ben Ramanauskas, senior research fellow in economics at Policy Exchange, pointed to cooling labour market conditions and subdued economic growth as reasons to begin easing monetary policy. He warned that maintaining restrictive policy risks exacerbating economic problems and potentially driving inflation below target.
Arguments for Maintaining Current Rates
The majority view emphasised several key concerns:
- Persistent inflation pressures despite some positive indicators
- Elevated inflation expectations among businesses and consumers
- Recent increases in oil prices that could add to inflationary pressures
- Strong wage growth metrics that remain above comfortable levels
Jonathan Haskel, a former MPC member and professor at Imperial College Business School, highlighted that inflation has proven "persistent" and noted recent Bank research showing minimal disinflationary effect from trade diversion of Chinese goods.
Looking Ahead to Future Decisions
Several committee members acknowledged that while current conditions warrant maintaining rates, future cuts remain likely. Anna Leach, chief economist at the Institute of Directors, noted that "disinflationary pressures are building" and predicted "more cuts to come this year" despite recommending a hold for the immediate meeting.
Katharine Neiss, chief European economist at PGIM Fixed Income, suggested that should current momentum in inflation easing continue, the MPC would likely pivot to "a more assertive rate cutting path" to align with other developed markets.
The Shadow MPC's recommendations provide valuable insight into professional economic thinking ahead of the Bank's official decision, highlighting the complex balancing act between controlling persistent inflation and supporting economic growth.
