UK rates on hold amid conflicting signals
Simon Ward
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Like the ECB-ometer (last post), my MPC-ometer has shifted in a hawkish direction over the last month. The May projection was for a 6-3 vote for unchanged rates, with three doves; the outturn was 8-1, with only David Blanchflower voting for a cut. This month the model suggests another 8-1 decision.
Activity indicators have weakened further and are at a level historically consistent with a half-point cut. However, the impact on the forecast has been outweighed by ongoing deterioration in the model’s inflation components. Consumer inflation expectations, manufacturers’ price-raising plans, average earnings growth and future inflation discounted by gilt yields have all risen over the month.
The MPC will not have early access to the May CPI numbers. Given the possibility that these will show a rise in annual inflation to the 3.1% letter-writing level, even those MPC members with an easing bias are likely to be reluctant to join David Blanchflower in voting for a cut this month.
For comparison, the Sunday Times Shadow MPC also voted 8-1 to keep rates on hold this month, following a narrow 5-4 decision last month. The MPC-ometer has a slightly better record over the 20 months since its inception: its average error has been 1.6 quarter-point votes per month versus 2.7 for the Shadow Committee.
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