Last week, the Chancellor Philip Hammond announced that when Ian MaCafferty's fixed term on the Monetary Policy Committee (MPC) ends at the end of August, he will be replaced by Jonathan Haskel. Ian MaCafferty was one of two members of the Committee to vote for a rate rise at the last meeting. He will still be voting at the 21st June and August meetings and we should expect him to support a rate rise at those meetings. Therefore, no change in direction imminently.
Jonathan Haskel is an Economics professor from Imperial College London and has a particular interest in productivity. In a recent blog, he described the UK productivity growth as "horrible". The lack of growth in productivity in the UK economy has been a problem for some time and having a specialist in this area of the economy on the MPC is welcome. A lack of growth in productivity may be the result of many factors but a lack of investment may be partially to blame. Getting investment in the British economy when there is so much uncertainty around Brexit is difficult. The expectation is that Professor Haskel will be less hawkish on interest rate rises than his predecessor.
Looking to the immediate future, no rate rise is expected at the meeting later this month, however the MPC may be prepared to move in August before the change of membership takes place. Earlier in the year, a rate rise was expected as early as the May meeting but as weaker data for the first quarter came through, Mark Carney guided expectations further out. As economic data for the present quarter comes in, market participants will be looking to see if the dip in the first quarter was long lived or more prolonged. Only two weeks ago, an August move was only priced in at 30% probability. However, the latest economic data has been positive, notably the April consumer credit and May purchasing managers indices came in stronger than expected. As a result, the market has raised the possibility of an August hike back above 50%. The timing of a rate rise will, as ever, be data dependent and the MPC will wish to see further confirmation that the first quarter weakness was just weather related before moving.
The exact timing of any rate move is less important for the broad markets than the long-term expectation for rates and the speed of rate rises. The Bank of England has said this will be gradual and to a limited extent. Unless the data dips again we expect one rate rise this year and one next year and the prospective new MPC member does not change this view.
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