The Shadow Monetary Policy Committee convened by City AM has voted six to three in favour of a Shadow MPC interest rate hold, urging the Bank of England to leave borrowing costs unchanged at 3.75 per cent even as inflation is expected to peak higher than previously forecast because of the continuing US-Iran conflict.
The nine-member panel, whose economists participated independently of their organisations, judged the decision to be finely balanced. Three members, professor Jagjit Chadha of the University of Cambridge and former NIESR director, Julian Jessop, and Anna Leach, chief economist at the Institute of Directors, voted to raise rates by 25 basis points. The remaining six backed no change.
Shadow MPC interest rate hold mirrors the Bank’s own decision
The shadow panel’s verdict closely tracks what the Bank of England’s own Monetary Policy Committee (MPC) actually decided. According to the UK Parliament House of Commons Library, the MPC voted on 30 July to leave rates at 3.75 per cent, with six members voting to hold and three voting to raise by a quarter of a percentage point. BBC News reported that the Bank said it stood ready to raise rates if the US-Iran war escalates further, and that this was the fifth consecutive meeting at which rates had been held.
Jack Meaning, Barclays chief UK economist, said he expected inflation to peak higher than previously thought over the coming months. He pointed to oil prices having risen back to levels seen in May, two months into the Iran war, with Brent crude standing at $106 per barrel compared with a low of $72 in early July. The conflict has spread across the Gulf region, slowing shipping through the Strait of Hormuz and the Bab el Mandeb Strait.
Despite those pressures, Meaning said he would hold rates because there was ‘little evidence of second round effects or broader inflationary pressures.’ He argued the Bank should retain a ‘hawkish message’ signalling that hikes remain possible, noting that two-year gilt yields implied traders were pricing in as many as four further rate increases.
The case for a rise: credibility and creeping persistence
Those voting to raise rates were not persuaded that caution was warranted. Leach called her decision a ‘close call’ but said it was determined by inflation remaining above the two per cent target for two years, elevated price expectations, and squeezed business margins. ‘The risk of a small rise now that is reversed later is less than waiting too long to raise rates, particularly given the MPC’s track record of the past few years,’ she said.
Chadha argued the Bank’s poor record of hitting its inflation target meant it needed to ‘re-state’ its credibility for maintaining price stability. He was critical of what he called ‘over-engineering, or discussing, quarter point movements in response to high frequency and noisy data in a risky world,’ and called for more consistent communication about the need to act against inflationary impulses.
Jessop said a pre-emptive 25 basis point rise would ‘reduce the need for larger increases later’ and would ‘safeguard credibility.’ He acknowledged the decision was finely balanced but noted that inflation had been above two per cent for most of the last five years and was unlikely to return to target for at least another year. ‘The argument that policymakers need to look past “temporary shocks” is wearing increasingly thin,’ he said.
Hold voters see contained pass-through and soft labour market
Among those backing no change, economist Ben Ramanauskas said weaknesses in the labour market would be worsened by a rate rise. He described private sector regular pay growth as ‘comfortably below levels consistent with above-target inflation,’ adding that energy price pressures had not passed through to wage settlements or services inflation, and that money supply growth offered ‘no urgent case for tightening.’
Kallum Pickering, chief economist at Peel Hunt, argued that conditions bore little resemblance to 2022, when energy prices pushed inflation to as high as 11 per cent. ‘Rate rises cannot produce barrels of oil,’ he said. ‘The cost of an energy shock must fall on either prices or output, and with second-round effects so far subdued, the lesser evil is to tolerate a temporary overshoot rather than inflict further damage on an already weak economy.’
Ruth Gregory, deputy chief UK economist at Capital Economics, said inflation was nearing the Bank’s own ‘adverse’ scenario, which projected inflation jumping above four per cent rather than peaking at 3.2 per cent in its central forecast. She said an insurance hike was not ‘clear-cut’ given weaker growth data expected later in the year and a loose labour market. Katharine Neiss, chief European economist at PGIM Fixed Income, and Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research, both voted to hold, with Pryce pointing to elevated gilt yields and the Bank’s quantitative tightening programme as already amounting to ‘significant monetary tightening.’
The Bank has said it will raise rates if the conflict in the Middle East escalates further, making the next round of inflation and labour market data the immediate test of whether the six-to-three split holds at the MPC’s following meeting.
