City AM's Shadow Monetary Policy Committee (MPC) has recommended that UK interest rates remain unchanged at 3.75% in April, despite growing uncertainty over the future path of monetary policy. A panel of City economists and academics voted 8-1 in favor of holding rates, citing the risk of higher inflation due to trade disruption across the Strait of Hormuz.
Conflicting Economic Signals
Economists have faced conflicting figures in April, complicating the Bank of England's upcoming decision. Official data showed the UK economy grew more than expected in the first quarter, while pay rise expectations also ticked up, fueling concerns that higher wages could push up price growth. However, inflation rose to 3.3% in March, marking the first sign of the Iran war's impact on UK prices, though some analysts suggest a weakened labor market could ease price pressures.
Government Warnings
Government ministers have warned that the effects of the war will be felt throughout the year, further complicating monetary policy decisions. Ruth Gregory, deputy chief UK economist at Capital Economics, described the upcoming vote as the "stuff of nightmares," noting that recent data has provided a messy picture of the economy. "The situation requires walking a fine line between keeping market rate expectations high enough to contain inflation expectations, but not so high as to damage economic growth," she said, adding that the Bank should avoid "dialling up the hawkish rhetoric."
Market Reactions
The comment refers to the shock to markets last month after minutes from the MPC meeting prompted traders to price in three interest rate hikes. Short-term gilt yields later dropped to 4.1%, equivalent to around one rate hike, but have climbed back above 4.4% in the last week, with the US-Iran ceasefire remaining shaky.
Dissenting Voice
Former MPC member Jonathan Haskel, a professor at Imperial College Business School, was the sole dissenter, calling for a 25-basis-point rate hike. Haskel argued that raising rates earlier would signal the Bank's commitment to keeping inflation near its 2% target. "Disruption from the Middle East conflict is continuing. Since the Bank will likely have to raise rates anyway, acting now sends a clear message that the MPC is determined not to let second-round effects take hold," he said.
Shadow MPC Members' Views
Anna Leach – Institute of Directors, Chief Economist
Vote: Hold
Reason: "The growth and inflationary environment has changed markedly. Inflation is expected to be notably higher but accompanied by lower growth. Data from the Bank's decision-makers panel suggests firms are expecting to push up prices in response to higher energy prices, increasing the likelihood of second-round effects."
Ben Ramanauskas – Policy Exchange, Senior Research Fellow
Vote: Hold
Reason: "The Middle East crisis has impacted headline inflation, but given the loose labor market, stalled wage growth, and normal money supply growth, second-round effects are unlikely. The more pronounced risk is that the crisis erodes confidence, leading to firm closures and higher unemployment. The Bank should hold but adopt a more dovish statement."
Jack Meaning – Barclays, Chief UK Economist
Vote: Hold
Reason: "Holding Bank Rate delivers modest tightening without unnecessarily squeezing the economy. Policymakers are balancing higher energy prices against weaker demand. Businesses and workers will find it harder to push up wages and prices, so second-round effects are less concerning than in 2022-23."
Jonathan Haskel – Imperial College Business School
Vote: Raise by 25 basis points
Reason: "Disruption from the Middle East continues. Raising rates now sends a clear message of determination to prevent second-round effects. Raising sooner means less raises later."
Julian Jessop – Independent Economist
Vote: Hold
Reason: "Sometimes the best thing is to do nothing, especially with so much uncertainty. The MPC cannot ignore upside inflation risks, but fragile demand, lack of corporate pricing power, and weak labor market should limit second-round effects."
Kallum Pickering – Peel Hunt, Chief Economist
Vote: Hold
Reason: "The Iran war imposes a significant external supply shock, pushing inflation above target and posing downside risks to employment. However, weak demand-side fundamentals contain second-round effects. The committee should signal that the next move could be up or down."
Katharine Neiss – PGIM Fixed Income, Chief European Economist
Vote: Hold
Reason: "Before the Iran crisis, I viewed UK rates could come down due to a weakening labor market and falling inflation. But activity indicators have held up while price pressures increased, reducing pressure to cut rates. The MPC needs to signal commitment to limiting energy price pass-through."
Ruth Gregory – Capital Economics, Deputy Chief UK Economist
Vote: Hold
Reason: "A wait-and-see approach is warranted to learn more about the energy price shock and potential second-round effects. But the risk of rate hikes later this year is rising. Businesses are confident in pricing power, and inflation expectations have risen. This is the stuff of nightmares for the MPC."
Vicky Pryce – Centre for Economics and Business Research
Vote: Hold
Reason: "There is too much uncertainty. Inflation is rising, but the Bank must assess how transitory this is and how fast the economy slows. Inflationary expectations are rising, but no sign yet of wage pressures building."
