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Is there any reason for the Bank of England to raise Bank Rate in May?

The next quarterly Bank of England Inflation Report will be published on 10th May to coincide with the outcome of the Monetary Policy Committee’s deliberations about the level of Bank Rate. Some weeks ago a further increase in Bank Rate from 0.5% to 0.75% seemed a very strong possibility. Now, though, the chances of a move look slimmer following the publication of data and news that suggest that parts of the economy, at least, are struggling.

Let’s look at the data first. Price inflation as measured by the Consumer Prices Index (CPI) fell in February from 3% to 2.7%. The prime aim of monetary policy is to contain price inflation so with the direction of the rate of inflation downwards – helped by a stronger Pound that keeps import prices down – the case for tightening monetary policy further at this stage seems weak. Let’s see if the data for March, to be published on Wednesday 18 April, confirm this trend.

Elsewhere a 0.2% fall in manufacturing output in February and a small increase in unemployment revealed by the latest survey by the Office for National Statistics (ONS) more than hint at sluggishness, at least in certain parts of the economy.

To me of greater concern has been the series of news stories which provide clear evidence of economic woes. The raft of stories about struggling retail companies - many of them household names - resonate with similar stories at the time of major recessions in the past. For some of these household names - those that sell household goods and fittings - the problems are linked to the slowdown in the housing market. The Royal Institution of Chartered Surveyors (RICS) has just reported that demand for property in the UK fell for the 12th consecutive month in March. This doesn’t just impact on house prices as a lower demand for property results in fewer people moving house and spending money on their new homes.

In addition there are a number of specific factors that are causing economic grief to certain sectors. The demand for new cars is being affected by uncertainties about future policy in respect of diesel cars. Job cuts announced this week by Jaguar Land Rover, following a slump in demand for their diesel cars, are clear evidence about the impact of this uncertainty.

The appalling weather in recent weeks and the wash-out for many parts of the country at Easter have hit garden centres and other seasonally-related businesses. Future weeks will confirm if retail sales have been broadly hit by this inclement early spring weather.

We won’t know how these news stories translate in economic data for some weeks yet as usually such data ‘lags’ rather than ‘leads’ the news stories. However I’m struggling at this stage to be positive about the near term outlook for the economy. If this feeling is shared amongst members of the MPC then no rise in Bank Rate will occur in May.

Martin Upton

Director, True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

13th April 2018

True Potential PUFin is based at the Open University Business School in Milton Keynes, UK

True Potential PUFin is the first and only personal finance research centre in the UK that has an active teaching programme freely available to the public. Supported by the University’s excellence in delivering distance learning, the Centre is uniquely positioned to develop the public’s financial capability and to research the impact and effectiveness of its education programme.

True Potential PUFin is supported by a five-year programme of financial support provided by True Potential LLP.

The views of True Potential PUFin academics do not necessarily reflect the views of True Potential LLP

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