Bank should lower rates this week, says Times shadow MPC

The Bank of England should lower interest rates for the second time this year at its meeting on Thursday, according to The Times shadow monetary policy committee.
Seven members of the nine-member shadow MPC voted in favour of lowering interest rates by at least a quarter of a percentage point, or 25 basis points, to revive consumer and business confidence amid weaker than expected inflation and a worsening jobs market.
The Bank has kept borrowing costs at 5 per cent since a quarter-point cut in August. Its future interest rate decisions could be complicated by Rachel Reeves’s near-term cash injection into the economy, funded by more borrowing.
The chancellor boosted public spending and investment by £70 billion in the budget last week, which the Office for Budget Responsibility said would contribute to keeping inflation above the 2 per cent target until 2029.
Some members of the shadow MPC said the Bank should lean against this increase in government spending either by keeping rates on hold at this week’s meeting or keeping monetary policy restrictive over the long term.
However, the stimulatory effects of the budget on the economy will be offset by a record £40 billion tax rise announced by the chancellor. Members of the shadow MPC said the rise in employers’ national insurance contributions risked curbing employment and wage growth, strengthening the case for easing monetary policy.
Headline inflation fell faster than expected in September to 1.7 per cent, below the Bank’s forecast, while services inflation, which is closely watched by policymakers, slid to 4.9 per cent. These easing price pressures led several shadow MPC members to call for a further reduction in borrowing costs.
Financial markets have been expecting a further quarter-point reduction from the Bank this month as ratesetters have struck a more doveish tone in speeches and interviews. Andrew Bailey, the Bank of England governor, hinted last month that policy loosening could be a “bit more aggressive”.
Several members of the shadow MPC noted that the outcome of the US presidential election — and the the winner’s trade policy — would partly shape UK future monetary policy decisions.
Charles Goodhart: 25 basis-point cut. In my view the emphasis in the budget on raising private sector employment costs was wrong-headed, but I doubt if it would have much effect on future interest rates, since the worsening employment outlook will be offset by a worsening inflation outlook. Anyhow, much more may depend on the US election result.
Bronwyn Curtis: 25 basis-point cut. Headline inflation is below the target and wage pressures are moderating. The OBR has estimated that the short-term fiscal stimulus from the budget will push inflation up by as much as 0.4 percentage points at the peak. However, policymakers may be underestimating the [adverse] impact of the tax-raising measures.
Martin Weale: 25 basis-point cut. Inflationary pressures in the labour market and in the service sector remain but I think there is room for a modest reduction. In the longer term, the budget does add to inflationary pressures and I expect rates to be higher than they would have been in its absence.
Andrew Sentance: 25 basis-point cut. This is an awkward decision for the MPC. Market expectations are heavily weighted towards a rate cut at this meeting and MPC members have done little to shift them. If the MPC does not cut rates, it will deliver a shock to expectations in the fragile financial market environment we have seen since the budget. Reluctantly, therefore, I will vote for a quarter-point rate cut.
Sir John Gieve: 25 basis-point cut. Looser fiscal policy is expected to keep interest rates a bit higher than they would have been in the medium term. But the recent news has been encouraging, with lower headline and underlying/services inflation than expected.
Karen Ward: 25 basis-point cut. It is possible that there is ongoing volatility in markets this week. Given there are already 22 basis points priced for Thursday’s meeting, the Bank should cut 25 basis points but not make any promises about future easing.
Kitty Ussher: 50 basis-point cut. The data shows a material change in the UK economy since the MPC last met in September. Against this backdrop, a restrictive policy stance is no longer appropriate.
Sir Steve Robson: hold. I would hold rates. The budget will make inflation higher than it would have been. The additional borrowing is part of this but, more importantly, giving a big quick boost to public spending will, as we have seen in the past, do much more for pay and other costs than for output.
Anne Sibert: hold.