News Column

Euro adds to reasons not to hike

September 4, 2014


OUR PANEL of experts voted to hold interest rates again this week, with dismal data from the Eurozone adding to weak UK wage inflation as the major reasons mentioned not to tighten policy.

The clear slowdown in the currency union has had little effect on hard economic data in the UK so far, but several of the analysts suggested that since a rate hike was not immediately necessary, it was best to hold fire.

Two Bank of England policy-makers voted for a hike last month, for the first time since 2011.

CITY A.M. SHADOW MPC VOTES 7-2 AGAINST RATE HIKE MICHAEL BIRD | CITY A.M.Despite robust growth, especially in the services sector, a decision seems even easier this month. The latest wage inflation data show that pay packets actually dropped by 0.2 per cent in the year to June. With little inflationary pressure visible there seem to be far fewer risks from holding policy currently than there would be from raising rates ahead of market expectations.

JAMES SPROULE INSTITUTE OF DIRECTORS SIMON WARD HENDERSON Raise bank rate by 0.5 percentage points. GDP revisions show the economy strengthening faster than expected, progress towards normalisation of monetary policy is urgently needed.

Raise bank rate by 0.5 per cent. The August Inflation Report projects 2.5 per cent inflation in two years' time on unchanged policy. "Gradualist" normalisation requires starting now.

VICKY PRYCE BIS AND CEBR ADVISER GEORGE BUCKLEY DEUTSCHE BANK Surveys continue to point to strong growth, but inflationary pressures - prices and wages - remain weak. It may not be long until upside evidence here points to the need for tightening.

While service growth continues, manufacturing and export data reflect a weak Eurozone and sterling's strength - business lending is declining and shop price inflation is still falling.

ROBERT WOOD BERENBERG BANK TREVOR WILLIAMS LLOYDS BANK No change this month. A hike in interest rates will be needed soon, but I would wait until wage growth improves and the Eurozone outlook clears.

With inflation easing further below the target in July, wage inflation very subdued and signs that growth is settling at a healthy pace, there is no need for an increase in base rate.

SAMUEL TOMBS CAPITAL ECONOMICS ROSS WALKER RBS Since inflation remains on track to slip further below its target and house price gains are moderating, there remains no pressing need to raise interest rates.

Hold. To add to weak wage inflation, there is now evidence of deterioration in the euro area and tentative signs of moderating activity in a number of domestic economy indicators.

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Source: City A.M. (UK)

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