May rate rise 'looks likely ', says EY

A Bank of England interest rate rise to 1 per cent this month is predicted by EY ITEM Club as inflation continues to rise and the jobs market remains tight.

But with the Monetary Policy Committee 's (MPC) focus seeing a shift from inflation risks to growth risks, the EY ITEM Club expects cautious language from the committee on further rate rises and a renewed attempt to push back against the tightening that investors currently anticipate.

A Bank Rate of 1 per cent is the threshold at which the MPC has said it will consider actively selling gilts purchased under the quantitative easing (QE) programme.

The uncertain outlook and recent rise in long-term interest rates leads the EY ITEM Club to think that the MPC will provide more detail on how 'quantitative tightening ' will work, but believes they will wait on selling gilts until a later date.

Martin Beck (pictured), chief economic advisor to the EY ITEM Club, says: “The MPC 's dilemma in setting monetary policy amid rising inflation and slowing growth isn 't getting any easier.

“On balance, the EY ITEM Club thinks the MPC will raise Bank Rate to 1 per cent from the current 0.75 per cent. But recent comments by MPC members have put more emphasis on the prospect of economic slowdown and recession.

“So signals around further interest rate increases are likely to become more cautious.

“Recent developments have given the MPC some reasons to justify higher interest rates. A rise in CPI inflation to 7 per cent the following month was a big upside surprise, as the MPC had forecast inflation to remain around 6 per cent.

“And the labour market has stayed tight. Job vacancies rose to a new record high in early 2022, resulting in one vacancy for every unemployed person, the first time this milestone has been reached since the data began in 2001.

“But strong demand for workers has not been matched by supply. The number of working-age people classed as inactive is around half-a-million higher than at the start of 2020 and the employment rate about a percentage point lower.

“However, the extent to which labour market tightness is feeding into bigger pay rises, a key concern for the MPC, is still unclear. Although headline (three-month average of the annual rate) pay growth picked up in February, that was largely due to the volatile bonus component. Regular pay growth has been much softer and well below inflation. And other pay indicators have been mixed. ”

Mr Beck added that a rise in the Bank Rate this month may not prove to be the only mechanism by which monetary policy is tightened.

“The official interest rate at 1 per cent is the point at which the MPC previously said it would consider actively selling some of the £875bn of gilts purchased by the Bank under its quantitative easing programme. ”