MONETARY POLICY COMMITTEE PATE’S GRAMMAR SCHOOL MONETARY POLICY COMMITTEE

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

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

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

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

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

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

House Prices and Consumption Source: ONS

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

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

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

NLW Gains Across Distribution Source: Resolution Foundation

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

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

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

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)

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

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

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

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

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%

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

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

GDP Forecast Source: ONS, own forecasts

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

Inflation Forecast Source: ONS, own forecast

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

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

Sweden in 2011 Source: Sveriges Riksbank

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