Ruth Gregory, who is the deputy chief UK economist at Capital Economics, said the upcoming vote for the Bank of England was the “stuff of nightmares” as recent data had provided a messy picture of the economy.
“The situation requires walking a fine line between keeping market rate expectations high enough to contain inflation expectations, but not so high as to damage economic growth,” Gregory said.
She added that the Bank should avoid “dialling up the hawkish rhetoric”.
“Ruth Gregory – Capital Economics, deputy chief UK economist
Vote: Hold interest rates
What has influenced your decision?
“A wait-and-see approach is warranted to learn more about the size and duration of the energy price shock and the potential for second-round inflation effects.
But the risk that interest rates will need to rise this year is rising. The extent of the surge in the various PMI prices balances suggest businesses are confident in their pricing power. This comes on top of the sharp rise in the Citi/YouGov measure of 5 to 10-year ahead households’ inflation expectations which may have sparked concerns on the MPC about a de-anchoring of inflation expectations.
“This is the stuff of nightmares for the MPC and could be one reason why it takes out an insurance policy in the form of rate hikes in the coming months.”