Key facts
- City AM's Shadow Monetary Policy Committee advised the Bank of England to hold interest rates at 3.75% on Thursday.
- The decision was influenced by easing inflation, falling job vacancies, and a drop in Brent Crude oil prices.
- Inflation stood at 2.6% in the year to June, with GDP showing modest growth.
- One member, Professor Jagjit Chadha, advocated for a 25 basis point rate hike to re-establish credibility.
- Most City banks anticipate two members of the Bank of England's MPC will vote for a hike, while others will vote to hold.
City AM's Shadow Monetary Policy Committee has advised the Bank of England to maintain its current interest rate of 3.75% at its upcoming meeting. This recommendation comes after recent economic data indicated a cooling of inflation pressures and concerns about potential wage-price spirals.
The Shadow MPC, a panel of economists, noted that inflation dropped to 2.6% in the year to June, and job vacancies have fallen, suggesting that the risk of a wage-price spiral is diminishing. Additionally, GDP growth was modest at 0.1% in May 2026, potentially reflecting tamed demand. The cooling of hostilities between the US and Iran also contributed to a drop in Brent Crude oil prices to around $80 per barrel.
Despite these factors, markets have priced in at least two interest rate hikes in the medium term, as indicated by two-year gilt yields. Some economists, like Julian Jessop and Katharine Neiss, supported a 'wait and see' approach, emphasizing that broad money growth is too weak to fuel sustained inflation and that higher market rates are already tightening financial conditions.
However, Professor Jagjit Chadha, one of the nine members, argued for a 25 basis point rate hike to reassert the Bank's commitment to price stability, noting that inflation has been above the 2% target for a significant period. He stressed the need for vigilance against inflationary impulses.
Most City banks anticipate that two members of the Bank of England's Monetary Policy Committee, Huw Pill and Megan Greene, will vote for a rate hike, while the remaining members will vote to hold rates. Other potential 'hawks' include Catherine Mann and Deputy Governor Clare Lombardelli.