Policy rate unchanged – against all expectations
Forthcoming wage settlements a determining factor
The MPC assigns greater weight to the wage negotiations than we had expected. We had assumed that, at this stage of the game, the MPC would content itself with warning that excessive pay increases would trigger a policy rate hike. Even though the CBI’s inflation forecast indicates very low near-term inflation, which would otherwise give cause for a rate cut, it is clear that the Committee considers the uncertainty in the forecast to be concentrated on the upside, at least from the standpoint of wages, and the uncertainty great enough to warrant a pause in the monetary easing cycle that began last November and has delivered a combined rate reduction of 0.75 percentage points.