City AM Shadow MPC urges Bank of England to hike interest rates

The Shadow Monetary Policy Committee (MPC) of City AM, comprised of leading economists, has urged the Bank of England to raise interest rates by 25 basis points from 3.75% to 4% on Thursday. The committee claims that higher energy costs are becoming embedded within the UK economy, leading to rising consumer prices and increasing wage pressures. Six out of nine Shadow MPC members advocated for the rate hike, while the other three called for leaving rates unchanged.

Kallum Pickering, a top City researcher, along with former Whitehall economists Vicky Pryce and Ben Ramanauskas, argued that raising interest rates now would not effectively curb inflation and would place additional pressure on households and firms. Pickering suggested that the Bank should "look through" temporary effects, with historical data indicating that a repeat of the 2022 inflation spike is unlikely.

Barclays chief UK economist Jack Meaning supported the rate hike, stating that failing to act could undermine confidence in the Bank and expectations. Meaning also noted that holding rates might "overshoot" inflation targets, but he believed a small precautionary increase was warranted due to the risks of embedded inflation in wage and price-setting behaviors.

Anna Leach, chief economist at the Institute of Directors, expressed concern that rising inflation could become permanently embedded in wage and price-setting behaviors. She emphasized the risks of leaving rates unchanged, as they could exacerbate wage pressures and push up broader wage-related costs.

Ben Ramanauskas from Policy Exchange argued that the Iran war had created a supply-side shock with no evidence of excess demand in the economy. He urged the MPC to hold rates and maintain a stance of preparedness to raise or lower Bank Rate, rather than acting as though it is 2022.

Despite the concerns raised, a majority of economists argued that the rising inflation, expected to exceed 4% in the coming months, posed a risk to the Bank's two percent price stability target. Barclays' Jack Meaning concluded that a modest hike now would protect the Bank's credibility and provide time to assess the effects of the April 2027 energy price cap on wage settlements.