In light of this morning’s labour market statistics indicating a 0.5% quarterly increase in unemployment for the three months ending July, the Institute of Directors (IOD) is urging the Bank of England to reconsider further hikes in interest rates.
The next meeting of the Bank’s Monetary Policy Committee is set for 21 September.
Kitty Ussher, chief economist at the Institute of Directors, said: “With today’s data showing a weakening labour market, it is now time for the Bank of England to keep interest rates on hold when it next meets on 21st September.”
Ussher highlighted that although wage inflation is high, it’s largely fuelled by recent public sector pay settlements, which won’t lead to cost pass-throughs from employers. “Although wage inflation still feels high, the headline rate is now being driven by the recent public sector pay settlements which will not lead to cost pass-through on the part of their employers.”
Additionally, she mentioned that private sector wage growth has been at a slower pace recently and is expected to decrease as the labour market loosens and headline inflation rates decline. “Private sector pay wage pressure, although also high, has grown at a lower rate in recent months and is likely to fall further as the labour market loosens and the headline rate of inflation comes down.”
IOD’s own research indicates that the substantial interest rate hike in June has negatively affected business leaders’ economic outlook. “Our own data shows that the large interest rate rise in June led to a worsening in the way that business leaders considered the outlook for the economy.”
According to Ussher, the Bank of England needs to allow its existing policies to take effect before making additional changes. “The Bank of England should now give its medicine time to work. The holy grail of a soft landing where we bring inflation down without causing a recession is still possible; the risk now is that too much tightening will unleash a series of negative events that causes the Bank to undershoot its inflation target further down the line.”
