We forecast that the CBI’s Monetary Policy Committee (MPC) will announce a policy rate increase of 0.25 percentage points on 4 October, the penultimate interest rate decision date for this year. The key interest rate – the rate on seven-day term deposits – will then be 9.5%. The decision will presumably reflect a tug-of-war between ever clearer signs that tight monetary policy is strongly affecting households and businesses, on the one hand, and persistent inflation and high inflation expectations, on the other.
Divided opinion on the August rate hike
The MPC was not unanimous about the rate increase announced in August. As he did in May, Gunnar Jakobsson voted against Governor Ásgeir Jónsson’s proposed 50bp rate hike, preferring to raise the policy rate by 25 basis points. He thought the impact of the most recent rate hikes might be underestimated, as interest rates had risen sharply in the recent past and the full effect had yet to emerge. The real rate had been on the rise, and the monetary stance had tightened steadily over the preceding year. As a result, he thought it more likely than not that large rate increases would not be needed to bring about additional tightening.