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.”