Top economists have voted 8-1 for interest rates to be slashed by 25 basis points in City AM’s new Shadow Monetary Policy Committee (MPC).
Amid high inflation and falling job numbers, the Bank of England is set to face a difficult finely balanced decision on Thursday on whether to cut interest rates from the current 4.25 per cent level.
The Bank faces a battle in getting annual price growth down to two per cent, with inflation ticking up to 3.6 per cent in the year to June.
Officials will take a view on whether the rise in the unemployment rate to 4.7 per cent could lead to lower price growth in the next year, with the effects of President Donald Trump‘s tariffs, Chancellor Rachel Reeves‘ taxes and volatile energy prices also set to weigh on monetary policy decision-making.
City AM has assembled a Shadow MPC of top economists from across academia, industry, think tanks and financial services to vote on monetary policy ahead of the Bank’s formal decisions on interest rates.
Each responded with their own views, which did not necessarily reflect the position of respective organisations or employers.
Eight shadow policymakers voted for an interest rate cut, pointing to the strain on jobs in the UK.
Just one City AM rate-setter – the only member to have previously served on the Bank’s own MPC – voted for a hold.
Anna LeachCut 25 basis pointsBen RamanauskasCut 25 basis pointsJack MeaningCut 25 basis pointsJonathan HaskelHold at 4.25 per centJulian JessopCut 25 basis pointsKallum PickeringCut 25 basis pointsKatharine NeissCut 25 basis pointsRuth GregoryCut 25 basis pointsVicky PryceCut 25 basis points
Ahead of the Bank’s official decision on Thursday, City AM’s Shadow MPC said:
Anna Leach – Institute of Directors chief economist
Anna Leach voted for interest rates to be cut by 25 basis points.
Leach said: “While headline inflation came in slightly above expectations in the latest data, and private sector wage growth has also surprised to the upside, neither overshoot is yet significant.
“Meanwhile, the labour market continues to loosen: the ratio of unemployed people to vacancies is rising, and business surveys suggest that underlying demand remains weak.
“Recent UK GDP figures have been volatile, driven in part by one-off policy changes such as vehicle excise duty, stamp duty, and trade tariffs. But the broader picture remains subdued: growth is expected to be around one per cent both this year and next.”
“On balance, the inflation outlook still points to falling inflationary pressures. Inflation expectations have softened, hiring intentions remain low, and global demand will be a little softer this year and next. High uncertainty, both domestic and international, continues to weigh on business decisions.,” Leach said.
“While the stickiness of core and domestic inflation warrants caution, the overall environment supports a further modest reduction in interest rates.”
Ben Ramanauskas – Policy Exchange senior fellow
Ben Ramanauskas voted for interest rates to be cut by 25 basis points.
He said the Bank’s monetary policy had been “too restrictive” and “damaged business confidence”, resulting in a loosening of the labour market.
“The recent increase in inflation is unlikely to persist given that the most recent data show that money supply growth has slowed,” he said.
“While inflation remains above target, it is projected to return to target in the short to medium term.”
Jack Meaning – Barclays chief UK economist
Jack Meaning voted for interest rates to be cut by 25 basis points.
“The labour market is clearly loose and is continuing to loosen,” Meaning said.
“Unemployment is rising as vacancies fall. Wage growth is high, but has been slowing since at least the start of the year. In my view, policy remains restrictive and is weighing on jobs, growth and prices.
He said the time lag between a change in monetary policy and the effects allowed policymakers to move ahead with a rate cut.
But inflation remains high, with “elevated inflation expectations” likely to pose a risk to getting price growth back down.
“Easing too aggressively could entrench a higher rate of inflation and this would hurt households and businesses. In the extreme it could call into question the commitment of the central bank to achieve the medium-term inflation target.
“Walking the tightrope between these two leads me to think a cautious cut of 25 basis points would strike the right balance.”
Jonathan Haskel, Professor of Economics at Imperial College Business School and former MPC member
Jonathan Haskel voted for interest rates to be held at 4.25 per cent.
Haskel pointed to inflation remaining above target and services inflation as being “remarkably sticky” as a key reason for his vote.
“If [services inflation] remains at 4.7 per cent, goods inflation will have to be minus 0.7 per cent to meet the target of 2 per cent. In a world of tariffs, goods deflation seems almost impossible. On this argument, monetary policy has to stay tight,” Haskel said.
Haskel suggested the case for cutting interest rates would be on wage growth being lower than expected and a weak demand outlook.
But he said: “The rise in unemployment would have moderated wage growth in any case.”
Haskel added that the labour market was “impaired” in the UK due to the impact of Covid while living wages had grown more than expected as a result of extending national insurance thresholds to lower salaries.
“Thus even with weaker demand, I think there is more inflationary pressure in the economy. Cutting rates with inflation above target given this background risks embedding wage pressures further.”
Julian Jessop – independent economist
Julian Jessop voted for interest rates to be cut by 25 basis points.
He said: “Inflation has been rising further above the 2% target, but this is unlikely to be sustained.
“The economy has stalled again, the labour market and wage growth are now cooling rapidly, and growth in broad money is easing from an already slow pace.
“A short-term interest rate of 4 per cent could be seen as the top of a range of 3 per cent to 4 per cent for a ‘neutral’ level.”
Kallum Pickering – Peel Hunt chief economist
Kallum Pickering voted for interest rates to be cut by 25 basis points.
He said: “The broad-based moderation in demand combined with rising labour market slack should bring inflation towards the two per cent target once temporary energy and regulated price effects which are temporarily lifting inflation above three per cent have faded.
“Monetary policy is still tight and the balance of risk favours further progress towards a more neutral policy stance.”
Katharine Neiss – PGIM Fixed Income chief European economist and deputy head of global economics
Katharine Neiss voted for interest rates to be cut by 25 basis points.
Neiss said a declining labour market would lead to “weaker domestically-generated inflationary pressures over the medium term”.
Ruth Gregory – Capital Economics deputy chief UK economist
Ruth Gregory voted for interest rates to be cut by 25 basis points.
But the former Treasury economist said there were “reasons for caution”.
“A near-term rise in inflation could cause households to push for bigger pay rises. So the upside risks to inflation are still very real.
“But with the weakening in the jobs market gathering pace, it is probably only a matter of time before inflation returns to the two per cent target.
“On balance, quarterly interest rate cuts that return rates from 4.25 per cent now to a more neutral setting of around 3 per cent remain appropriate.”
Vicky Pryce – Centre for Economics and Business Research chief economic adviser
Vicky Pryce voted for interest rates to be cut by 25 basis points.
“The slowing economy which is suffering from too long a period of high interest rates,” Pryce said.
“Much of the recent uptick in inflation is caused by domestic arrangements which allow certain prices charged to consumers to adjust upwards each spring, but this should iron out over the next few months.”
All views expressed are economists’ own rather than that of their employers.