Shock as Bank of England advised not to cut rates in August

One of the Bank of England monetary policy committee members has advised against a cut in base rate on August 1.

Jonathan Haskel - in a speech to an academic body earlier this week - said he wanted to keep interest rates on hold because inflation in the jobs market was still higher than anticipated. 

Until now there has been considered a very high chance that base rate would be cut at the next meeting of the MPC, in three weeks time.

Haskel says: “There are considerable encouraging signs, most notably from normalising inflation expectations and a (spoiler: temporary) return of headline inflation to target in May 2024. However, the wage-price system in the UK has been subject to a sequence of enormous shocks over recent years. 

“The playing out of those shocks through the economy, and the continued tight and impaired labour market, means that inflation will remain above target for quite some time. I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.”

Haskel - who leaves the MPC in the early autumn - has been regarded as something of a hawk and until earlier this year wanted base rate to go up from the 5.25% at which it has been held for around a year. 

Later in his speech, a copy of which appears on the Bank of England website, Haskel says: “Assuming no further shocks … it depends on the interaction of a tight labour market and second-round effects as previous inflation works its way through the wage-price system. That previous inflation is sufficient to impart momentum to current inflation, although not as much as in the 1970s. 

“I hope this helps explain why the MPC is looking closely at labour market conditions and underlying inflationary indicators such as services inflation. The labour market continues to be tight, and I worry it is still impaired. I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.”