Expert from Markit, Chris Williamson comments on the MPC and UK household finances
“The minutes from the latest Bank of England’s Monetary Policy Committee meeting reveal a mood of hawkishness developing steadily among policymakers.
“Although the nine MPC members voted unanimously to keep interest rates unchanged at their historical low of 0.5%. However, the minutes indicate that, if it were not for the Greek crisis, the decision would clearly have been much more ‘finely balanced’. Although most members would still have seen holding rates as the most appropriate stance, the minutes suggest that two members (most likely Ian McCafferty and Martin Weale) are clearly inching towards voting for borrowing costs to start rising .
“Recent days have also seen Mark Carney, the Bank’s governor, stressing that the decision to start hiking rates is drawing closer, remarking that “the decision as to when to start such a process of adjustment will probably come into sharper relief around the turn of this year”.
“The barriers to hiking rates have steadily come down. The economy retains strong growth momentum, with the PMI surveys indicating economic growth of around 0.5% in the second quarter with the pace of expansion picking up after a lull due to the general election. The PMI surveys are running at levels that are historically consistent with the Bank raising interest rates (see chart) to start to cool things down a little. Pay growth has also started to accelerate, rising to 3.3% in the private sector in the three months to May, its highest since 2008, and up to 3.8% if bonuses are included. Again, there are rates of growth that would normally start encouraging policymakers to start tightening policy.
“Although unemployment ticked higher, joblessness is likely to continue to come down in coming months, putting further upward pressure on wages, as the economy picks up speed again as general election and ‘Grexit’ uncertainties subside, though it should be noted that the minutes show a lack of unanimity on the extent to which wage growth and therefore inflation will pick up.
“By the end of 2015, the fall in commodity prices (notably oil) and sterling’s depreciation will have worked out of the annual inflation comparisons, lifting inflation higher and pushing pay reviews higher.
“Much will also depending on the external environment, though in this respect the easing of tension surrounding ‘Grexit’ – assuming no re-escalation of the crisis – suggests policymakers may be more hawkish at the next meeting.
“The chances of rates rising toward the end of the year are therefore rising, with November widely seen as a strong possibility as the Bank will have updated its forecasts.
“Households have already started to adjust to the reality of rate hikes drawing nearer, mentally at least. Markit’s latest Household Finance Index – based on a survey of 15000 households and providing the first indication of financial wellbeing each month, showed one-in-three households expect the Bank to starting hiking in the next six months picked up to 34%, up from one-in-four in June. This rose from 31% to 44% after Carney’s speech on 16 July, in which the growing possibility of a rate hike around the turn of the year was flagged up.
“The prospect of higher interest rates and signs of inflationary pressures picking up led to the lowest degree of household optimism about their future finances seen for a year.
“The Bank will be eager to see how changes in interest rate expectations are feeding through to both the housing market and consumer spending, and any signs of marked deteriorations in either could easily lead policymakers to push rate hike talk into next year.”