“We are not surprised that the MPC decided to leave base rates unchanged, as economic data has been providing very mixed messages over the last few weeks and would suggest that the services sector, particularly retail, is staging something of a post-war pick-up, on the back of a bounce-back in consumer confidence,” he said. “Yet, in contrast, manufacturing activity continues to contract.
“Looking ahead we think that the MPC will cut base rates further, as the rate of growth of consumer spending continues to decline against a backdrop of falling house price inflation and a subdued global outlook, particularly in the Eurozone.”
Indeed, since the last MPC meeting, although house prices rose on a month-on-month basis, the annual rate of growth still followed a declining trend, in line with The Woolwich forecast of house price inflation falling to 8% by the end of this year.”
As for inflation, although RPIX is currently running at three per cent, the Woolwich points out that stripping out the effects of house prices and oil leaves the underlying inflation rate very close to the lower end of the target range, at around 1.5%. As the rate of house price inflation continues to slow, and as the price of oil has subsided following the end of the war, the lender thinks there is a distinct possibility that RPIX inflation could undershoot the target markedly over the near term.
“Putting all this together, with the fact that the pound has stabilised since May’s MPC meeting, means that we think there is a clear chance now that the balance on the Committee could easily swing in favour of a rate cut in coming months,” said Johns.