A hawkish speech by monetary policy committee member Andy Haldane has caused sterling to rise.
The Bank of England chief economist made a case for both holding rates or hiking, but concluded that the risks associated with tightening too early or too late “has swung materially towards the latter in the past six to nine months”.
At midday sterling had risen to $1.2691 following his comments to the National Museum of Science and Media in Bradford.
In the nine months since the Bank of England cut rates to 0.25 per cent, the world outlook has materially improved, European populist parties failed to gain meaningful ground in elections, and downside risks to global inflation have eased, Haldane said in his case for tightening monetary policy.
The worst Brexit fears have failed to materialise, he added.
However, making the case for sitting tight, Haldane noted the sharp slowdown in Q1 UK growth could be a “harbinger of things to come” and that there are already signs of a sharp slowdown in big-ticket discretionary purchases by consumers, including houses, cars and household goods.
“If this persisted, it too could justify monetary policymakers staying their hand,” Haldane said.
Haldane considers tightening is needed well ahead of expectations, says Ian Kernohan, economist at Royal London Asset Management.
“Having thought there were only two hawks left on the MPC, it is now clear that there are three,” says Kernohan.
The last meeting of the monetary policy committee kept rates at 0.25 per cent, but the vote was split 5-3. Kristin Forbes, who voted in favour of a rise, will be replaced at the next meeting.
However, RLAM still considers a rate rise unlikely due to the impact of political uncertainty on business confidence and the continued squeeze on household real incomes.
“It is not yet clear if any weakness in consumer spending is being offset by investment and net trade.
“Domestic inflationary pressures and in particular wage growth remain very subdued, with most of the recent rise in inflation due to the temporary impact of sterling devaluation.”