There are indications of a rate rise as soon as May

The minutes of the Monetary Policy Committee were released today, confirming that the interest rates will remain at 0.5%. The committee voted 7-2 to keep the rates the same, but provided some hawkish signals which suggests there may be change on the horizon. The votes of McCafferty and Saunders for an immediate hike certainly suggest that change could be coming. The committee will not meet in April, and by May, analysts expect that the conditions might be right for a rise in interest rates.

interest rates rise

Inflation beats expectations

Official data showed that Consumer Price Index dropped from 3% in January to 2.7% in February. This is quicker than the Bank of England had previously expected, and is thought to be due to the fact that the fall in the value of the pound after the EU referendum has been washed out of the system. The inflation rate assesses what has been happening to prices over the latest 12 month period, which means that as a new month comes in, an old month drops out. The months now leaving the period of assessment from early 2017 were when the effects on the weaker pound were most significant, which in comparative analysis leads to a slowing in the rate of inflation. However, Brexit isn’t the only indicator. Positive figures from the Office of National Statistics (ONS) showed that retail sales volumes picked up in February after growing by 0.8% compared with January, but this was largely attributed to growth in petrol, supermarkets and online shopping. The ONS report on non-food items showed a drop of 0.3%, suggesting consumers are focussed on essential items and are continuing to feel the squeeze in their household budgets. 

Labour statistics positive sign for interest rate rise

The employment rate came in at 75.3%, higher than last year which showed a rate of 74.6% and the joint highest since records began in 1971. In real terms, the number of people in work has now risen to 32.25 million. The Office for National Statistics reports show that this is 168,000 more than for August to October 2017 and 402,000 more than the same time last year. Average earnings including bonuses rose by 2.8% in the same period, 0.1% up on the previous month. Although the number of people out of work rose by 24,000 to 1.45 million in the three months to January, the second month in a row to show an increase. However, statistically the rate of unemployment fell from 4.4% to 4.3% which is contributing to upward pressure on wages. 

NHS wage deal could add more upward pressure to wages

The news that key NHS employee unions have reached a deal with NHS employers for a wage increase could have a knock-on effect on public sector pay across the board. The deal is for at least a 6.5% increase across the board over three years and has been formally agreed by union leaders and ministers this week and is due to be voted on by staff. If agreed by the summer, the pay will be aback dated to April 2018.

What next for interest rates and the pound?

The pound made gains against the US dollar and the euro ahead of today’s MPC decision; there was a slight dip as the news grew more imminent, but the pound currently appears to be holding on to its gains, and has reached its highest level against the euro since June 2017. Investors are perhaps heartened by what appears to be a very real possibility of a rate hike in May. Although nothing is guaranteed, the Bank of England warned investors back in February that it will raise interest rates faster and further than expected if the economy continues to evolve in line with Inflation Report projections. Rising pay packets can spur inflation and this could be part of the reason for the hawkish signals from Monetary Policy Committee. The latest economic news fits in with these expected changes. The statement gave further clues that a rate rise is on the very near horizon. The pound, however, may remain tied to the ongoing Brexit negotiations as much as domestic policy and currency investors are likely to keep one eye on the political news across the globe, even whilst scanning the economic reports. 

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