A fresh wave of inflation data is poised to heighten anxieties at the Bank of England, as economists remain sharply divided over whether interest rates should be held steady or raised further. With headline inflation projected to breach three per cent for a fourth consecutive month in May – driven by elevated energy prices and supply-side shocks – policymakers are under intense scrutiny to demonstrate their commitment to tackling the cost of living crisis.
According to a poll of leading economic thinkers, 7 out of 9 members of the City AM Shadow Monetary Policy Committee (MPC) have advised the Bank to maintain its current interest rate at 3.75 per cent. The lone dissenters, Julian Jessop and Jonathan Haskel, proposed respective increases of 25 basis points and an unspecified amount to bolster credibility and combat rising wage growth.
Supporters of a hold, including Ben Ramanauskas and Anna Leach, pointed to the Bank's forecasted two per cent inflation target within two years as justification for caution. Leach highlighted the importance of focusing on second-round effects in the wake of sluggish demand, while Ramanauskas acknowledged that weak demand could mitigate the persistence of headline inflation.
Ruth Gregory at Capital Economics expressed concerns about public perception should rates be perceived as insufficient to address inflation. She anticipates rate cuts by 2027 due to economic weakness, but warned against underestimating wage growth's potential 'second-round effects'.
Attention is squarely focused on the Bank's forthcoming decision, with the Office for National Statistics set to release crucial data on inflation and employment. Economists forecast a May inflation reading of three per cent (up from 2.8 per cent in April) alongside a five per cent unemployment rate, although some anticipate a potential rise to 5.5 per cent this year.