Inflation hits 2.9 per cent: Should the MPC HIKE or HOLD interest rates?

As UK inflation reaches 2.9 per cent, should the MPC HIKE or HOLD interest rates?

HIKE – Andrew Sentance, senior economic advisor at PwC.

This is the third major surge in inflation since the financial crisis. In the previous two episodes – 2008/9 and 2011/12 – the Monetary Policy Committee (MPC) blamed external factors and argued that the economy was not strong enough to sustain an interest rate rise. That cannot be said this time round. Unemployment is the lowest since the mid-1970s and job vacancies are at the highest level since the current series started in 2001. The reluctance of the Bank of England to raise interest rates contributes to the weakness of the pound and undermines its commitment to low inflation. It is true we are in a period of political uncertainty, reinforced by the outcome of the General Election. But the MPC should be independent of politics. An initial quarter point rise in the official bank rate would be a proportionate and precautionary response to the recent surge in inflation and would open up the option of further rises – following the lead taken by the US Federal Reserve.

HOLD – Vicky Pryce, board member of CEBR and former joint head of the Government Economic Service.

It is true that the rate of inflation has risen sharply to above the Bank of England’s 2 per cent target – and it could rise still further for a while. But the inflation we are experiencing is due mostly to external factors such as higher world energy prices and the impact of the fall in the pound since the referendum, which should all eventually run their course. There is on the other hand little domestic inflation pressure. Real wages are falling year on year and disposable incomes are forecast to be stagnant or decline for 2017 as a whole. This is casting doubts on the consumer continuing to sustain economic growth. The shock result of a hung parliament in the June 8 snap general election has added to the political and economic uncertainty and dented confidence. Raising the cost of borrowing at a time of such uncertainty, including the new concerns over the nature of the imminent Brexit negotiations, would seem like an own goal.

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