Hawk flutters at Bank of England despite economic weakening

The wider UK economy now looks on course for a slowdown in the July-September quarter

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The Independent Online

Bank of England policymaker Kristin Forbes dropped a hawkish hint on interest rate rises yesterday even though surprise pain for the UK’s building industry capped a poor week for the recovery.

The Monetary Policy Committee member fuelled speculation that she could switch sides to vote for dearer money by arguing that a stronger pound might have less impact in dragging down inflation than thought.

Ms Forbes – who joined the MPC last year – argued that the exchange rate did not have the effect that current academic thinking implied on products more sensitive to import prices or international competition. She suggesting that “sterling’s recent appreciation could create less drag on import prices and inflation than we might have expected”.

In a hint that she could soon join the MPC’s sole hawk Ian McCafferty, Ms Forbes added: “If this plays out, monetary policy would need to be tightened sooner.” Financial markets are pricing in a rate rise for May next year.

Her comments came after a deeper than feared 1 per cent fall in construction output in July – figures that laid bare the biggest annual slide in home building for over two years.

Other downbeat data this week showed a surprise fall for manufacturers and a ballooning goods deficit, while the National Institute of Economic and Social Research estimates that growth slowed to 0.5 per cent in the quarter to August.

The Bank of England has refused to panic so far over the softening of the data, although financial markets endured a turbulent August, caused by worries over Chinese growth.

The wider UK economy now looks on course for a slowdown in the July-September quarter from the  0.7 per cent growth between April and June. IHS Global Insight’s Howard Archer said: “Much will depend on how well the dominant services sector performs in the third quarter, but it currently looks like GDP growth will come in no better than 0.5 per cent.”

July’s sudden tumble for the construction industry more than reversed the bounce in the previous month and confounded City pundits’ predictions of 0.5 per cent growth over the month. Work on building public and private housing fell 5.8 per cent and 2 per cent respectively.

Overall the amount of new housing being built is now 2.5 per cent below last year, according to the Office for National Statistics – the first decline since March 2013. Output across the wider industry was down 0.7 per cent compared with last year, marking the first annual dip since May 2013.

The decline comes despite industry efforts and government initiatives to increase the number of homes being built, including automatic permission on brownfield land.

µ The Bank of England’s latest inflation attitudes survey found 50 per cent of respondents expect interest rates to rise over the next 12 months, up from 38 per cent in May.