Unpredictable economy makes interest rate decision difficult says WBS academic

THE UK economy remains difficult to predict, which is why policy makers at the Bank of England remain split over when to raise interest rates, a Warwickshire academic has said.

John Thanassoulis, a Professor of Financial Economics at Warwick Business School, said the divisions within the Monetary Policy Committee were made worse because of fluctuations in the rate of inflation.

Latest figures from the Office for National Statistics show the rate of inflation fell 0.3% to 1.6% in July.

Professor Thanassoulis said: “The current UK inflation figure is hard to interpret. The economy is recovering as GDP has been growing; house prices have been rising and unemployment has been falling. Thus in the near term one would expect inflation to start picking up. This will occur as the labour market tightens so that workers can start to bargain for higher wages.

“This all points to inflation rising and an early initial rate rise. And yet this month’s inflation figure is down. This could suggest that the economic picture is worse than the above analysis suggests.”

However, he said the ONS highlighted other reasons for the month’s interest rate fall, for example, the late timing of the summer sales due to good weather, which meant clothing prices were unusually high in June this year and so the fall to July more pronounced than usual.

The strengthening presence of Aldi and Lidl in the supermarket sector was also forcing the major players in the sector to discount their own prices, triggering a retail price war, he added.

Another factor was the low ebb of the Eurozone, which is making sterling appreciate so that imported goods appear cheaper when priced in pounds.

“If these reasons are correct then the low inflation figure is likely to be an aberration as the sales and price war effects run their course. One would expect UK economic growth to continue in September and wage growth to follow in due course. Which of these competing explanations applies is unclear,” added Prof Thanassoulis.