According to Morgan Stanley, the MPC is probably comfortable in the current “period of monetary policy calm” and will wait until the dust settles after May’s general election before increasing rates.
It says the UK economy must have climbed out of the recession before rates are increased, and while Morgan Stanley thinks GDP will be in positive territory by the end of this year, the MPC will continue to be disappointed with growth.
Morgan Stanley analyst Melanie Baker says the bank will have to wait until it is able to assess inflation in the third quarter of 2010 before it can decide to up rates beyond 0.5 per cent.
She says: “The outlook in February 2010, the date of the next Inflation Report, is likely be clouded by the rise in VAT to 17.5 per cent. The subsequent Inflation Report, in May, could well coincide with the general election and the Bank of England would probably baulk at taking such an important monetary policy step then.”
Baker also says lower reserve remuneration should not be discounted – reports suggested the Bank may reduce its reserve rates to encourage institutions to take the spoils of quantitative easing into the real economy and she thinks this issue may arise again next year.
She says: “If short-term market rates start to rise before the MPC is ready to tighten policy, then lowering remuneration on a portion of reserves is much more likely to happen. This could help to put a cap on short-term market rates.”