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MPC may deliver interest cut this week, says Simon Ward

New Star’s “MPC-ometer” statistical model has shown that the MPC may surprise markets by delivering a further interest rate cut this week.

The firm says that a week ago, the model, based on 13 economic and financial indicators, suggested a cut in April rather than March.

New Star says that the forecast has now changed, in response to more recent economic data and financial market developments, with a narrow 5-4 vote in favour of a quarter-point reduction now predicted.

The model performs well in historical back tests, correctly predicting 90 per cent of MPC decisions. Of the 10 per cent of failures, 5 per cent were due to the model predicting a change in interest rates one month early.

New Star economist Simon Ward says: “The last Inflation Report indicated that the MPC expected to cut interest rates but was inclined to be cautious because of near-term inflationary pressures. Credit market conditions have, however, deteriorated further since its last meeting, suggesting greater downside risks to the economy and a possible inflation undershoot over the medium term.”


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