UK Interest Rate Decision: Let the Hawks Squawk


UK Interest Rate Decision: Let the Hawks Squawk

The news that three external members of the Bank of England’s Monetary Policy Committee (MPC), out of the eight voting members, wanted to raise interest rates in June came as a shock to financial markets.

Indeed, anyone who has been paying attention to UK central bankers in recent weeks might be led to conclude that the prevailing evidence on the strength of the economy was mixed and the risks to growth were balanced. Far from it, the direction of travel in recent data is quite clear; the UK economy is slowing.

Yes, inflation has picked up in recent months. But that’s hardly a surprise. It was widely anticipated that the steep decline in sterling following the referendum vote would lead to a spike in inflation in the following year. Beyond that currency effect, there is little evidence of wage pressures in the labour market or other signs of an overheating economy that might suggest a sustained build-up of inflationary pressure across the economy.

Some commentators have suggested that a solitary hike to reverse last August’s cut would mark a step back towards normality. Indeed, while such a hike will not in itself significantly undermine the economic outlook, the risk is that it could be misinterpreted by investors and markets could drive much further tightening in financial conditions.

In light of the prevailing backdrop of elevated political and economic uncertainty, the Bank’s decision to leave interest rates unchanged was the right one. Let the Hawks Squawk!

Abi Oladimeji

Chief Investment Officer

Commentary first appeared in:

Portfolio Adviser (in print on the 2nd August 2017)

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