Issues That Will Likely Influence MPC’s Decision on Interest Rates

Monetary Policy Committee

Sources claimed that the only interest rate rise that has been recorded apart from the 2008 rise interest rate took place last year in November. That was when the Bank of England reversed its decision on a cut to 0.25% which it previously declared in 2016. On Thursday, 2nd of August 2018, the Monetary Policy Committee will decide whether or not to raise the interest rates of the Bank of England.

According to industry experts, some core issues would affect the outcome of MPC’s decisions. Some of these issues include:

Employment

Analysts have expressed that if employment were the only metric for an economic measure, the Bank of England would have begun increasing its interest rates since 2015. At that period, the market for jobs was expanding rapidly and breaking different record highs. It experienced low inflation as well as a rapidly growing GDP. However, only a few members of the MPC, such as Martin Weale and Ian McCafferty moved for an increase in interest rates. Others with the inclusion of the Governor of the Central Bank held a different view because, in their opinion, the wages were still quite low.

Sources indicate that the only interest rate rise that has been recorded apart from the 2008 increase in interest rate was in November 2018.

However, since that year, the employment rate has been recording historical highs as older citizens and women have begun returning to the job market. Currently, the employment rate is at an all-time high of 75.7%, and the unemployment rate is at a low of 4.2%, the lowest it has been in 33 years.

According to reports, the Corporate sector in Britain is in dire need of additional skilled staff, and the demand has increased now that foreign European workers are not enthusiastic about coming to the UK for employment purposes. That precludes that the labor market would likely become tighter. The combination of the issues bordering on employment point to the fact that interest rate is likely to rise.

Wages

The combination of the strong employment rate and the low unemployment rate has done nothing to influence the growth of wages which has remained weak. Based on standard economic models, that shouldn’t be the case. For instance, the Phillips curve states that an increase in wages should accompany a strong employment level.

According to a recent study by David Blanchflower of Dartmouth College and David Bell of Stirling University (US), the standard measure of employment has some flaws. Their latest study revealed that when you put underemployment into consideration, the unemployment rate will surge to 7.7% from a low of 4.2%. According to the academic, that explains why wages are only rising at an average of 2.7% as opposed to the 3% to 4% which the Bank of England reportedly requires for changes in wage prices. Thus, based on the wage rate, there would be no rate rise.

Inflation

The combination of the strong employment rate and the low unemployment rate has done nothing to influence the growth of wages which has remained weak.

Sources claim that the Bank of England has plans to maintain the measure of inflation of consumer prices at 2%. If it is above or lower than that, policymakers are expected to indicate how they expect to steady it back in two years. Getting this done, according to industry experts, isn’t an easy feat.

According to them, the economy of the UK is currently one of the most open globally with high imports and exports level. The surge in oil and gas prices in 2011 increased inflation to about 5% while a plummet in the price of oil and gas in 2015 made the CPI fall less than zero. In 2017, the fall in the value of the sterling also led to inflation by about 3%. Analysts confirm that in all those instances, prices were not affected by domestic pressures.

Sources claimed that in most cases, central bankers refer to core inflation to exclude all volatile factors including oil prices as that gives room for more stability. However, since 2008 the core inflation in advanced countries has ranked lesser than 2%.  In response to this phenomenon, central banks have made attempts to provide momentum to economic activities by maintaining low interest rates. In addition, they have also employed different measures to ensure the effectiveness of their policies. In the UK, for instance, the measure includes offering credit subsidies to banks so they can keep mortgage rates low as well as quantitative easing to encourage banks to lend more to businesses to.

However, studies have shown that the ability of the quantitative easing to stimulate economic activities has reduced over the years. Also, the GDP is presently at a yearly rate ranging between 1.3% and 1.6%. All the issues bordering on inflation suggest that there would be no rate rise.