IoD: ‘Bank is right to hold off interest rate hike’

Responding to the Bank of England’s decision to hold interest rates at 0.5% this month, Tej Parikh, Senior Economist at the Institute of Directors, said:

“Business leaders will welcome the Bank of England’s decision not to spring any surprises this month, but firms and households will be on tenterhooks for what comes in May.

“The Bank has been paving the way for a rate rise, but must tread lightly until there is richer evidence of growing inflationary pressures, to avoid unnecessarily placing a speed bump in the way of economic activity.

“The future path for prices has been muddied by recent developments. A dip in inflation – with the impact of weaker sterling finally washing through – alongside softer economic growth and the potentially dampening impact of snowy weather on business activity in Q1, certainly made the case for holding rates this month.

“The Bank has also been focusing in on Brexit negotiations and tightness in labour market. On the former, the transition agreement has removed a major hurdle for economic confidence, and for the latter near record lows of unemployment have seen some pick-up in earnings. While both could increase inflation, the effect is likely to be limited, as businesses still face uncertainty around the precise nature of Brexit and SMEs currently do not have the capacity to raise wages significantly, given high costs and productivity constraints.

“All in all, it’s unclear how prices will evolve from here, so it’s best to wait and see.”