Shadow MPC tells Bank of England to hike to 4% to defend its credibility
Six of nine economists on City AM's Shadow Monetary Policy Committee have told the Bank of England to raise interest rates by 25 basis points to 4 per cent on Thursday, arguing that holding at 3.75 per cent would put the central bank's credibility at risk as inflation heads above 4 per cent within months.
The majority warned that higher energy costs are at risk of becoming embedded in the UK economy, feeding into consumer prices and wage settlements. Barclays chief UK economist Jack Meaning said holding rates "risks unsettling expectations and undermining confidence in the Bank", though he urged the committee to make clear that a single hike should not be read as the start of the larger tightening cycle markets have priced in. Institute of Directors chief economist Anna Leach called a small precautionary rise "a sensible choice", pointing to Budget-confirmed living and minimum wage rates that sit above expected average wage growth.
The three dissenters argued the inflation pressure is an external supply shock the committee should look through. Policy Exchange's Ben Ramanauskas said the Iran war had created a supply-side shock "which the MPC cannot and should not try to respond to", with a weakened labour market and low business and consumer confidence offering "no evidence of excess demand". Peel Hunt chief economist Kallum Pickering drew the parallel with 2008 and 2011, when oil-price spikes lifted inflation temporarily and the Bank looked through them, rather than 2022. CEBR chief economic adviser Vicky Pryce noted the US Federal Reserve and the European Central Bank paused last week, seeing little sign of inflation spreading beyond energy.
Cambridge professor Jagjit Chadha, a hike voter, said the Bank had kept inflation at or below target for only a few months in the past five years and that its "primary duty" was price stability. Capital Economics' Ruth Gregory said a 25 basis point rise was "warranted" and expected only one further increase after this meeting, to 4.25 per cent, well below the 5 per cent investors have priced.
What it means for Pakistan: A Bank of England hike would widen the gap between UK and Pakistani policy rates at a time when the State Bank of Pakistan's own decisions are watched closely by holders of rupee assets, and it would raise the cost of servicing Pakistan's sterling and dollar-linked external liabilities. It also matters for the roughly 1.6 million-strong Pakistani diaspora in the UK, whose remittances are a mainstay of Pakistan's current account: higher UK borrowing costs feed through to mortgages and household budgets there, which can temper how much is sent home.
