Ahead of tomorrow’s interest rate decision by the Bank of England, Karen Ward, Chief Market Strategist for EMEA at J.P. Morgan Asset Management comments:
“In my view, the Bank of England (BoE) needs to set out a framework to guide expectations for rates in the coming months. It is entirely possible that transitory factors push inflation below the 2% target over summer, which might naturally lead the market, and broader public, to expect rate cuts.
“However, if the labour market is still generating medium-term inflationary pressures, then cutting interest rates would be the wrong thing to do. Why? Sticky wage growth would be a sign that the labour market and broader economy is already at full capacity. Falling inflation in itself could lead to a real wage boost and a reacceleration in spending, above what the economy can cope with. Indeed there is already some evidence of this reacceleration in the business surveys. Adding rate cuts might further fuel the underlying capacity problem.
“It might be helpful for the Bank to lay out explicitly which indicators of medium-term inflationary pressure it is focused on to guide its policy decisions. And to state, at an early stage that, just as it erred away from placing too much weight on transitory high inflation, it will also place less weight on transitory low inflation.”
