The US Federal Reserve and European Central Bank (ECB) both slashed interest rates at their last meetings, citing trade wars and stubborn inflation respectively.

 

With the UK economy in contraction – it shrank 0.2 per cent in the second quarter – and inflation falling in August, there is a case for the Bank of England to copy its counterparts and lower rates.

 

But for Threadneedle Street, Brexit trumps all else, City A.M.’s shadow monetary policy committee (MPC) has said. Our board of top economists voted eight to one to keep rates on hold.

 

With the clouds of political uncertainty hanging over the UK economy, they said, Britain’s central bank should keep its main interest rate on hold at 0.75 per cent until the picture clears up.

What City A.M.’s shadow MPC decided

Guest Chair: Ruth Gregory – Capital Economics

Hold

It is normal for the UK to follow the global trend – particularly the US – but the economic conditions in the UK don’t warrant lower interest rates. Pay growth has reached its highest since 2008. Inflation expectations have been rising. And the different starting points of the UK and US economies mean that rates won’t necessarily fall in tandem. So if there is a Brexit deal or a long delay, the UK could raise rates. If there’s a no deal, the UK could follow the US in cutting rates – but for very different reasons.

Erik Norland – CME Group

Hold

In my view, the MPC should keep rates on hold. Inflation is close to target. Brexit is still up in the air. Growth is slowing but not alarmingly so. As such, no reason to change policy just yet.

Vicky Pryce – CEBR

Hold

Inflation is below target, business and consumer confidence remains fragile on Brexit fears. The world trade environment shows little sign of improving and UK forecasts for 2019 have been downgraded again.

 

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