Is an interest rate hike imminent?

News that the Monetary Policy Committee (MPC) came close to raising rates in June was a shock. In fact, the unexpected 5-3 vote in favour of keeping rates on hold was the closest the MPC has come to a rate hike in six years.

What’s more, minutes from the Bank of England and two key speeches from the Governor, Mark Carney, and MPC member, Andy Haldane, in the last few days has enlightened us to the change in narrative with respect to tightening monetary policy.  

Market expectations now price in a 50% chance of a rate rise as early as November 2017.

So, what’s changed?

Dissecting the MPC’s minutes was particularly revealing. In summary, the MPC feels:

1. The inflation overshoot relative to the target could be more pronounced than previously thought.
2. Spare capacity in the economy is being eroded and therefore tolerance of above-target inflation is waning.
3. A number of indicators of domestically generated inflationary pressure have increased over recent months.
4. The withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.
5. All Committee members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

On balance, five members of the Committee thought it still appropriate to keep rates on hold while three members thought the outlook justified an immediate rise in rates.

Overall, we remain concerned that a rate hike before the end of 2017 could significantly damage economic growth and, particularly, retail spending. From our perspective:

1. GDP growth of 0.2% in Q1 2017 is hardly reason to celebrate.
2. Wage inflation remains weaker than expected and this is vital for domestically generated inflation.
3. Real earnings growth is declining (-0.6%) and likely to get worse. We forecast declining real incomes for the rest of 2017.
4. Brexit uncertainty has been heightened since the general election. We believe risks of a hard Brexit have increased.
5. Political instability.
6. Recent survey data from the housing market (the Nationwide index had recorded its longest run of negative monthly readings since the height of the financial crisis), retail sales (ONS reported weakest volume growth since April 2013), BRC Retail Sales Monitor (Non-food performance weakest since May 2011) and a range of Retail Economics research on consumer debt, perceptions of job security and appetite for future spending have all weakened.

The focus on economic data and interpreting its impact on the consumer sector has never been more important for businesses to keep track of and understand. It won’t be until the end of July until we get first sight of the economy’s performance in Q2 2017 – just ahead of the Bank’s August Inflation Report. It will then be another three months before we get sight of Q3 data where we feel households are likely to be facing the toughest headwinds and the consumer sector will be under intense pressure.

While this week has reminded us not to take the accommodative stance from the Bank of England for granted, our money is on no rise this year. We do also take some comfort from Carney’s personal view which he expressed in his speech earlier in the week: "from my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment.”

We hope that his view carries a lot of weight with his fellow MPC members.