15 February 2018

  |  CBI Updates Team


Bank of England's MPC set the stage for May rate rise

While monetary policy was left unchanged in February, an increasingly hawkish tone from the Bank of England’s MPC suggests that there may be another rise in interest rates in May and a slightly faster pace of rate rises further ahead. 

Bank of England's MPC set the stage for May rate rise

The latest meeting of the Bank of England’s MPC saw no change in monetary policy in February, following a rise in interest rates in November 2017. However, the increasingly hawkish tone of the MPC’s communications suggests that another rise in interest rates in May is on the cards. In particular, the MPC states that if the economy evolves as they expect, monetary policy would need to be tightened earlier and to a greater extent than expected in November. Alongside their latest Inflation Report, the MPC upgraded their GDP growth forecasts slightly, such that they now expect the economy to grow above its potential over their forecast period. This fuels inflationary pressure, thus prompting the MPC’s judgement of a greater tightening in monetary policy ahead, for more detail, see the CBI’s note on last week’s announcement.

The latest inflation figures could be seen to reinforced the MPC’s hawkishness. CPI inflation was unchanged in January 2018 at 3.0%, slightly higher than consensus expectations of a fall to 2.9%. Furthermore, core CPI inflation picked up from 2.5% to 2.7%, largely driven by upward pressure from the price of admissions to zoos and gardens. While we still expect inflation to fall further ahead, we may see some upside in the near-term from the recent pick up in oil prices.

Meanwhile, IHS Markit’s composite PMI indicated a soft start to the year in terms of activity, dropping to 53.5 in January from 54.9 in December. While this reading still indicates positive growth, it was the weakest reading since August 2016.

The ONS’ latest release of the UK index of production showed that industrial production fell by 1.3% (month on month) in December 2017, well below consensus expectations, as the temporary shutdown of the damaged Forties Pipeline in the North Sea dragged heavily on the mining and quarrying sector’s output. This drag should be temporary, however, with underlying growth looking firmer. In particular, manufacturing production accelerated in December on the back of the lower pound and firm global growth.

Meanwhile, construction output grew by 1.6% in December, thanks to continued demand for private housing and an upturn in new work from the public sector. However, overall conditions in the sector remained subdued, with construction activity falling for the third consecutive quarter in Q4 2017: the longest period of decline since Q3 2012.

For more information contact Charlotte.Dendy@cbi.org.uk