1. MONETARY POLICY COMMITTEE
PATE’S GRAMMAR SCHOOL
MONETARY POLICY COMMITTEE

2. Policy Recommendation
Maintain the Bank Rate at 0.5%
Hold asset purchases at £375bn
State-contingent forward guidance:
Normalisation conditional on three quarters of accelerating economic growth and core inflation

3. MONEY MARKETS
International monetary policy, credit availability and the exchange rate

4. International Monetary Policy
Source: Federal Reserve, European Central Bank, own forecasts
Key: Past data Forecast

5. Depreciation until EU referendum has passed
Exchange Rate
Source: Bank of England, own forecasts
Key: Past data Forecast Feb forecast Nov forecast
Depreciation until EU referendum has passed

6. Money Supply Source: Bank of England, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

7. Housing Market Source: ONS, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

8. House Prices and Consumption
Source: ONS

9. Summary of Money Markets
Inflationary
Deflationary
Supply-demand imbalances to cause further house price growth
QE and rate cuts in Eurozone to depreciate Euro
Rising confidence in banking sector and rising supply of credit
Market pessimism reflected in negative yields and capital flight
Sterling not to recover as expectations of first rate rise pushed back to 2019
Overall effect: inflationary

10. Consumption, investment and government spending
DOMESTIC DEMAND
Consumption, investment and government spending

11. Average Weekly Earnings
Source: LMS Labour Market Statistics, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

12. NLW Gains Across Distribution
Source: Resolution Foundation

13. Consumer Confidence +5 n/a +12 -10 -12 n/a
Source: GfK, Pate’s Consumer Survey
Index type
Confidence over last 12 months
Confidence about next 12 months
Since last month
Since this time last year
Personal finances
↑ 1 point
↑ 8 points
↓ 1 points
↑ 2 points +5
Major purchases
↓ 4 points
n/a
+12
General economic situation
↓ 7 points
↓ 15 points
-10
-12
Pate’s
Consumer
Survey
Modal expectation changed from slightly better to no change
n/a
Modal expectation changed from a little better to a little worse

14. Savings Ratio
Source: ONS, own forecasts
Key: Past data Forecast

15. Consumption Source: Bank of England, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

16. Investment Intentions
Source: BCC, CBI, Pate’s Business Survey
Sector
Percentage of firms with investment intentions, latest quarter
BCC
CBI
Plant and equipment
Training
Property, plant and equipment
Product and process innovation
Manufacturing
24%
↑ 6 points
23%
↑ 3 points
–3%
↑ 11 points
13%
↓ 4 points
↑ 2 points
Services
20%
26%
↓ 1 point
n/a
Pate’s
Business
Survey
% of firms planning major capital purchases
48%
(over next year)

17. Investment Source: Bank of England, own forecasts
Key: Past data Forecast Feb forecast Nov forecast
Source: Bank of England, own forecasts
Investment to accelerate after political uncertainty of the EU referendum has passed
Time

18. Government Spending Source: OBR, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

19. Summary of Domestic Demand
Inflationary
Deflationary
Higher income growth and easing credit availability
Accelerated fiscal consolidation
Investment intentions to rebound after EU referendum
Resilient confidence in personal finances supporting consumption
Overall effect: inflationary

20. Imports, exports and the balance of payments
EXTERNAL DEMAND
Imports, exports and the balance of payments

21. Growth and Inflation in Trading Partners
Source: ONS, IMF, own calculations
Growth in 2016
Partner
Growth rate (annual)
Weight (% exports)
Weighted growth rate
United States
2.6%
12.7%
0.33%
Germany
1.7%
10.5%
0.17%
Netherlands
2.1%
7.6%
0.16%
France
1.3%
6.5%
0.08%
All others
3.4%
62.7%
2.13%
Average weighted growth rate in 2016: 2.88%
Inflation in 2016
Partner
Inflation rate
Weight (% imports)
Weighted inflation rate
Germany
1.01%
14.6%
0.15%
China
2.47%
8.9%
0.22%
Netherlands
1.25%
8.0%
0.1%
United States
0.98%
6.8%
0.067%
All others
1.4%
62.7%
0.878%
Average weighted inflation rate in 2016: 1.41%

22. Net Trade Source: ONS, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

23. Summary of External Demand
Inflationary
Deflationary
Higher trade-weighted growth rate for export markets
Emerging market turmoil
Depreciation over 2016 to support net trade in the medium term
ECB stimulus to have positive but small impact on EU economy
Overall effect: moderately inflationary

24. GDP Forecast
Source: ONS, own forecasts

25. Oil prices, commodity prices and core inflation
COSTS AND PRICES
Oil prices, commodity prices and core inflation

26. Oil Prices Source: IMF, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

27. Commodity Prices
Source: IMF, own forecasts
Key: Past data Forecast

28. Core Inflation Source: Trading Economics, own forecast
Key: Past data Forecast

29. Summary of Costs and Prices
Inflationary
Deflationary
Oil price to increase due to OPEC-Russia production freeze
Large and still-growing stockpiles of oil may provide price buffer
Depreciation of sterling to increase import costs
Commodity firm exits beginning to accumulate
Overall effect: slightly inflationary

30. Unemployment, productivity and the output gap
LABOUR MARKETS
Unemployment, productivity and the output gap

31. Unemployment Source: ONS, OECD, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

32. Productivity Source: ONS, own forecasts
Key: Past data Forecast Feb forecast Nov forecast
1. Worker “hoarding” during the recession – keeping workers employed despite not needing them - damaged productivity and is now less prominent
2. Positive investment intentions in the service sector, so increased productivity here will counter stagnant manufacturing unemployment
3. Recruitment difficulties are encouraging training to increase productivity – over a quarter of private sector firms plan to increase their training budgets over the next 12 months

33. Wilcoxon Two-Sample Rank Sum Test
Statistical Investigation of Inflation Expectations
Wilcoxon Two-Sample Rank Sum Test
Null hypothesis (H0):
“The median difference between the two samples of inflation expectations is zero.”
Alternative hypothesis (H1):
“The median difference between the two samples of inflation expectations is not zero.”
Significance level: 10%
Two-tailed test; 59 observations in first sample, 26 observations in second sample.
The test statistic (W = 1146) does not lie within the critical region (k < 946, k > 1290). The sample median of expectations lacks statistical significance so the alternative hypothesis must be rejected.
There is insufficient evidence to suggest that the inflation expectations of the second sample are different to those of the first sample.

34. Employee Compensation
Source: ONS, own forecasts
Key: Past data Forecast

35. Unit Labour Costs Source: ONS, own forecasts
Key: Past data Forecast Feb forecast Nov forecast

36. Output Gap Source: HM Treasury, own forecast
Our current output gap estimate = - 0.1%
Average estimate = - 0.3%

37. Summary of Labour Markets
Inflationary
Deflationary
Unemployment to sink even lower, necessitating wage rises
Investment and credit availability to (eventually) boost productivity
Skills shortages and recruitment difficulties
Introduction of National Living Wage and apprenticeship levy
Overall effect: inflationary

38. Our inflation forecast, historical analysis and policy recommendation
CONCLUDING REMARKS
Our inflation forecast, historical analysis and policy recommendation

39. Strong inflationary pressures Weak inflationary pressures
Overall Summary
Strong inflationary pressures
Weak inflationary pressures
Labour markets
External demand
Money markets
Costs and prices
Domestic demand
Final assessment: moderately inflationary

40. Inflation Forecast
Source: ONS, own forecast

41. Estimate of Wicksellian Rate of Interest using COMPASS
Source: Bank Underground, own estimates
Estimate of Wicksellian Rate of Interest using COMPASS
Key: Past data Estimate

42. Japan in 2000
Source: Bank of Japan (日本銀行)

43. Sweden in 2011
Source: Sveriges Riksbank

44. Policy Recommendation
Maintain the Bank Rate at 0.5%
Hold asset purchases at £375bn
State-contingent forward guidance:
Normalisation conditional on three quarters of accelerating economic growth and core inflation