We expect the Bank of England’s (BoE) Monetary Policy Committee (MPC) to hold interest rates steady when they meet early next month, following confusing signals sent by the Office for National Statistics (ONS).
The ONS has recently made headlines with its decision to delay the release of critical labour market data. This move has raised concerns about the accuracy of the ONS’s workforce assessments, with the statistical agency having previously noted increased uncertainty in labour market estimates due to a significant drop in response rates during the Covid-19 pandemic.
The delay and resultant uncertainty in labour market data pose significant issues beyond just reliability and transparency, however. Workforce statistics are a crucial metric used by the MPC in shaping the future path of monetary policy. Uncertainty in the data is far from ideal, especially if it diverges from other key labour market indicators[1], and the implications of basing policy decisions on inaccurate data are profound.
It is likely that MPC members may have already formed their opinions on the future path of monetary policy independent of the labour market statistics. A growing cohort, including BoE Governor Andrew Bailey and Chief Economist Huw Pill, are advocating a ‘tabletop approach’ to monetary policy, preferring to maintain rates in restrictive territory for an extended period, instead of pushing for further hikes. Such an approach banks on a gradual, steadier path to quell inflation and shield the public from the economic turbulence that could otherwise result if the Bank instead pursued a series of additional hikes and subsequent cuts.
Their rationale isn’t without merit. The UK’s GDP growth is sluggish, manufacturing woes prevail, and further tightening risks an even deeper downturn. Additionally, there is a need to account for the lagged effect of past hikes and there is hope that higher bond yields will serve as a substitute for further rate increases via their impact on property and other markets.
Such an approach carries significant risks, however. For one, it runs the risk of inflation remaining sticky for a prolonged period. The most recent inflation data for September reinforces this worry. Headline inflation remained stagnant at 6.7% and core inflation registered only a marginal decrease. Geopolitical conflicts and possible energy price hikes loom on the horizon as upside risks to inflation.
At Cebr, we have consistently held the view that elevated UK inflation is likely to persist. The present economic climate only bolsters our assessment, with a return to target inflation unlikely until the late 2020s.
Consequently, the MPC faces a daunting challenge. The stakes are high, given prior criticisms for forecasting and communication missteps. The recent data quirk only adds more fog to the scene, complicating their policymaking further.
Monetary policy literature suggests caution is paramount in times of heightened uncertainty, including scenarios involving measurement errors.[2] Accordingly, we expect the MPC to adopt a similarly prudent stance, maintaining interest rates at their current level at the forthcoming MPC meeting in November. This approach allows room for manoeuvre, ensuring a more informed, measured, and flexible decision-making process in this intricate economic landscape.
For more information, please contact:
Pushpin Singh, Senior Economist
Email: psingh@cebr.com, Phone: +44 (0)20 7324 2871
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.