Hold interest rates but ‘sound hawkish’, City PM Shadow MPC tells Bank of England
The Bank of England should hold interest rates on Thursday, City PM’s Shadow Monetary Policy Committee has said, after a string of economic data prints showed the threat of spiralling inflation had eased.
The Shadow MPC – a group of economists compiled by City PM – said a series of economic data releases had suggested rate-setters have more breathing room on inflation and interest rates should be left at 3.75 per cent.
Economists take part in the Shadow MPC independently of their organisations.
Analysts across City banks and investment companies have broadly agreed that UK monetary policy depends on the flow of oil and gas out of the Gulf region and whether workers react to a spike in prices by bargaining for higher wages, an inflationary risk referred to as “second round effects”.
The Brent Crude oil price has dropped to around $80 per barrel this week as hostilities between the US and Iran cooled, having briefly hit $100 last week when an Iran-backed militia attacked Saudi Arabian ships.
Figures published by the Office for National Statistics have calmed nerves about interest rate hikes. It revealed that inflation dropped to 2.6 per cent in the year to June, though price growth is set to edge up again as energy prices are reset.
Job vacancies also fell, easing concerns about a wage-price spiral, while GDP expanded by just 0.1 per cent in May 2026, potentially reflecting tamed demand effects.
Markets have, however, priced in at least two interest rate hikes to take place in the medium term, as per two-year gilt yields on Tuesday afternoon.
‘Wait and see mode’ allows interest rate hold
Some members of the Shadow MPC urged the Bank of England to wait for further data justifying an interest rate hike.
“Broad money growth remains too weak to fuel a sustained rise in inflation, while higher market interest rates are already tightening financial conditions,” the economist Julian Jessop said.
PGIM Fixed Income economist Katharine Neiss also said that lower headline inflation and slow private sector pay growth allowed the Bank to remain in “wait and see mode”.
One out of nine members, Professor Jagjit Chadha, who replaced Office for Budget Responsibility chair-select Jonathan Haskel in the Shadow MPC, favoured an interest rate hike due to the country’s struggles in getting inflation to stick to two per cent over recent years.
“Alongside a firmer stance against inflation, communication must be more consistent about the need to act with vigilance against inflationary impulses and not to look for excuses to cut rates,” Chadha said.
The Bank of England’s interest rates decision on Thursday is set to be fraught with difficulties. Economists at the central bank will have to make forecast judgment calls on growth, inflation and unemployment.
Most City banks expect two members to vote for an interest rate hike again – Huw Pill and Megan Greene – and the rest of the MPC to call for a hold.
Other potential hawks include Catherine Mann and Clare Lombardelli, the deputy governor of the Bank.
How City PM’s Shadow MPC voted
Anna Leach – Institute of Directors, chief economist
Vote: Hold
What has influenced your decision?
“We seem no closer to a sustainable end to the conflict in the Middle East, which means oil and gas prices are once more on the ascent and risks have sharpened. But most other developments give the Bank of England more breathing space on rates.
“Financial conditions have already tightened. The UK’s 10-year borrowing costs are 14 per cent higher than when the Office for Budget Responsibility locked down its Spring forecast. The UK’s labour market remains pretty soft as private sector wage growth has dipped below three per cent for the first time since 2020.
“And business leaders report that uncertainty continues to slow decision-making, particularly when it comes to investment, with areas of discretionary spend under pressure, and hiring on hold.”
Ben Ramanauskas – Economist
Vote: Hold
What has influenced your decision?
“Hold for now but resume cutting as soon as possible. While inflation remains above target, the balance of risks does not justify tightening.
“This remains a supply-side story with little evidence of meaningful second-round effects: wage growth has not accelerated and inflation expectations have remained broadly anchored.
“Money supply growth is running within normal historical ranges. If anything, this reinforces the reading that current inflation reflects a transitory shock working its way through the price level rather than a structural change in the inflation trend.
“Labour market slack should be a growing concern. It’s primarily driven by the increase to the minimum wage, the national insurance hike, and the Employment Rights Act. Roughly one million young people are not in employment, education, or training and this does not look likely to improve anytime soon. A hike now would exacerbate this and cause lasting damage to the economy.”
Jack Meaning – Barclays chief UK economist
Vote: Hold
What has influenced your decision?
“Inflation data has continued to fall. While inflation will clearly rise in the second half of this year, there is little that raising rates today can do to change that. The key question for policy is how much of this rise will become entrenched.
“Data in recent weeks suggests, to me, that the risk of worryingly sticky inflation remains contained. Wage growth has slowed further, inflation expectations have proven responsive to the initial easing of energy prices, and firms continue to indicate that they see limited scope to raise prices.
“Obviously, the recent resurgence of tensions in the Middle East shows that we are far from out of the woods and must remain vigilant, but raising rates now would be the wrong move given the balance of risks.”
Jagjit Chadha – Professor of Economics, University of Cambridge
Vote: Raise 25 basis points
What has influenced your decision?
“Over the past five years, we have been at or below the inflation target in only four months out of 60: we need to re-state our credentials for maintaining price stability. And not focus on over-engineering – or discussing – quarter point movements in response to high frequency and noisy data.
“During this business cycle, monetary policy has not met its prime objective and inflation expectations are becoming entrenched at a level inconsistent with price stability.
“Alongside a firmer stance against inflation, communication must be more consistent about the need to act with vigilance against inflationary impulses and not to look for excuses to cut rates.”
Julian Jessop – Economist
Vote: Hold
What has influenced your decision?
“This is a finely balanced decision. Inflation has been above two per cent for nearly two years and is unlikely to return to target for at least another year.
“A small rate rise now could send a clear signal that the Bank is determined to prevent inflation from spiralling out of control again. It would also be preferable to larger increases later – a case of ‘a stitch in time saves nine’.
“Nonetheless, the case for raising rates to protect credibility has weakened since the last meeting. There is still no sign of significant second-round effects from the surge in energy prices. Inflation expectations remain anchored, private sector wage growth continues to slow, and strong competition is holding down shop prices.
“Broad money growth remains too weak to fuel a sustained rise in inflation, while higher market interest rates are already tightening financial conditions.”
Kallum Pickering – Peel Hunt, chief economist
Vote: Hold
What has influenced your decision?
“Although growth has surprised to the upside since the start of the year, the underlying balance of demand and supply remains disinflationary. This explains why, despite the energy price shock coming from the unresolved Middle East conflict, overall rates of inflation have been weaker than the Bank of England had projected in April.
“The danger facing policymakers is in believing that they could face a repeat of the 2022 inflation surge — when excessively easy policy plus an energy price shock produced a large inflation surge. This time around, policy is tighter, demand momentum is not overheated, labour markets are softer and the external shock coming from energy is smaller.
“While the Bank of England should signal a preparedness to tighten, if necessary, in case price pressures begin to seriously pick up, supporting healthy growth momentum by remaining on hold remains the prudent course of action for now.”
Katharine Neiss – PGIM fixed income chief European economist
Vote: Hold
What has influenced your decision?
“The UK real economy is once again showing a good degree of resilience in the face of challenging shocks. In addition, both headline inflation and second round inflationary impulses (such as private sector pay growth) remain contained.
“That combination allows the Bank of England to be in wait and see mode at this time.”
Ruth Gregory – Capital Economics deputy chief UK economist
Vote: Hold
What has influenced your decision?
“Financial conditions have tightened further, the jobs market remains weak, and there is little evidence of the second-round inflation effects the Bank fears. So the MPC should remain on hold despite the latest rise in energy prices.”
“But it makes sense to continue to sound hawkish so that financial conditions don’t loosen. And a rate hike in the coming months could still be warranted if energy prices rise further and-or stay high, the chances of second-round effects increase further (either because the economy and-or the labour market is stronger than expected, or because businesses expect to raise wage growth and-or profit margins), or some of the tightening in financial conditions is reversed.”
Vicky Pryce – Centre for Economics and Business Research chief economic adviser
Vote: Hold
What has influenced your decision?
“Inflation will inevitably go up in coming months, but much of it is due to volatile external factors while both wage growth and inflationary expectations remain subdued.”