According to the Bank of England (BOE) deputy governor, the UK economy stands to emerge from economic slowdown as wage pressures increase.
The chances of a rate hike in August are high after a cautious policy setter at the BOE signalled support for increased borrowing costs. According to Sir Dave Ramsden, the UK economy appears to be getting out of an early soft patch at a time when income pressures are mounting. Ramsden who is just one of the two Bank of England monetary policy members to vote against a rate hike last November said that tighter policy is imminent otherwise inflation will surpass the government’s target of 2%.
During the November 2017 monetary policy meeting, Ramsden voted against a 0.25 point increase. He was just one of two members who voted against the increase. With his current sentiments, a rate hike is imminent in August.
Ramsden hinted on a rate hike during a recent speech in London. He stated that the slow growth in income is the main reason he had been taking a wait-and-see approach towards an interest rate hike in November adding that wage growth had been increasing steadily for the past two quarters. In his sentiments, Ramsden stated that the period of unusually slow growth in wages is most likely behind us.
Bank of England decided against an interest rate hike in May despite there being strong indications of a hike. In the weeks before the BOE’s MPC meeting, there was a run of disappointing economic data warranting a hike.
According to Ramsden, the evidence mounting since the last MPC meeting confirms the committee’s view of the economic slowdown being temporary. Although we are still in the second quarter which means it is still early in the data cycle and the last MPC meeting was a month ago, Ramsden feels the data that has been collected suggests the MPC’s interpretation of a temporary economic slowdown between January and March to be true.
The current data shows that consumer credit and consumer confidence has picked. The same applies to retail sales and a number of business surveys including the latest purchasing manager’s index or PMI output balance which represents 80% of the UK economy.
The PMI is calculated after a monthly survey is sent and filled by senior executives the largest companies in the UK. The survey targets data on new orders, production, inventory levels, employment and supplier deliveries. The PMI offers valuable information on the current business conditions according to company decision makers, purchasing managers and analysts. A high PMI is good for business and the overall economy. According to Ramsden, the May PMI was in line with expectations.
Looking forward, his expectations for the UK economy are also within the expectation of the Monetary Policy Committee’s best collective judgment expressed
in the latest inflation report forecasts. The UK’s global growth is intact although it looks less rosy than before. Ramsden expresses similar sentiments on the labour market by describing it as robust.
He expects the GDP growth to become steady although the pace and demand for goods and services continue to move from consumption to trade and investment.
Ramsden doesn’t see any problem with the current pace of growth since it would still be adequate to surpass the Bank of England’s new “lower speed limit” which was revised downwards because of the poor state of productivity performance of the UK’s economy ten years after the financial crisis. Unemployment is set to decrease to 4 percent, and a tiny margin of demand will open up.
In his speech, Ramsden added that without a 0.75 point rate rise expected over the next 3 years by the global financial markets, inflation is expected to remain around 2.4% which would be materially above the target which doesn’t seem like a desirable outcome. An inflation rate that is continuously above target coupled with prolonged periods of excess demand translates to the MPC’s failure to meet the remit.
Interest rate hikes tend to increase the cost of credit as lenders start charging borrowers more for loans. You should expect to pay slightly more interest on your payday loans, overdrafts, personal loans, mortgages among other types of loans if the BOE hikes the rate in August. A rate hike will, however, keep inflation levels in check as well as increase the value of the pound against major currencies.