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Bank of England doves right to thwart hawks seeking interest rate rise Bank of England doves right to thwart hawks seeking interest rate rise
(about 1 hour later)
The economy is looking wobbly. Living standards are being squeezed. A week after the general election Britain lacks an effective government. Is this the right time for the Bank of England to be thinking about raising interest rates?The economy is looking wobbly. Living standards are being squeezed. A week after the general election Britain lacks an effective government. Is this the right time for the Bank of England to be thinking about raising interest rates?
Well, three members of the Bank of England’s monetary policy committee think it is – the first time there has been a triumvirate in favour of dearer borrowing costs in six years.Well, three members of the Bank of England’s monetary policy committee think it is – the first time there has been a triumvirate in favour of dearer borrowing costs in six years.
Kristin Forbes, Ian McCafferty and Michael Saunders – the trio who voted for a quarter-point increase in interest rates to 0.5% – have a case, as the minutes of the latest MPC meeting show. Inflation stands at 2.9%, well above the government’s 2% target and higher than the Bank anticipated in its May inflation report. Inflation is heading above 3%, at which point the Bank’s governor, Mark Carney, will have to write an explanatory letter to the chancellor, Philip Hammond.Kristin Forbes, Ian McCafferty and Michael Saunders – the trio who voted for a quarter-point increase in interest rates to 0.5% – have a case, as the minutes of the latest MPC meeting show. Inflation stands at 2.9%, well above the government’s 2% target and higher than the Bank anticipated in its May inflation report. Inflation is heading above 3%, at which point the Bank’s governor, Mark Carney, will have to write an explanatory letter to the chancellor, Philip Hammond.
The continued fall in unemployment also meant a tighter labour market and, although the weak pound has put the brakes on consumer spending by making imports dearer, the other side of the coin is that a more competitive currency is helping exports and encouraging businesses to invest.The continued fall in unemployment also meant a tighter labour market and, although the weak pound has put the brakes on consumer spending by making imports dearer, the other side of the coin is that a more competitive currency is helping exports and encouraging businesses to invest.
The MPC hawks made the point that the Bank cut rates by a quarter-point to boost the economy after the shock result of the EU referendum last summer, and that given the better than anticipated growth and employment performance since there was now an argument for removing that part of the emergency stimulus package.The MPC hawks made the point that the Bank cut rates by a quarter-point to boost the economy after the shock result of the EU referendum last summer, and that given the better than anticipated growth and employment performance since there was now an argument for removing that part of the emergency stimulus package.
Even so, there are three reasons why interest rates are unlikely to go up any time soon. The first is that it was the last MPC meeting for one of the hawks, Kristin Forbes, whose three-year term ends at the end of the month. Even so, there are three reasons why interest rates are unlikely to go up any time soon. The first is that it was the last MPC meeting for one of the hawks,Forbes, whose three-year term ends at the end of the month.
The second is that we have been here before. On frequent occasions since the rates were cut to their then record low of 0.5% in early 2009 there has been a dissenting faction on the MPC calling for higher rates. Eventually, either the weakness of the economy or the weakness of inflation – and sometimes both – has forced them to back off.The second is that we have been here before. On frequent occasions since the rates were cut to their then record low of 0.5% in early 2009 there has been a dissenting faction on the MPC calling for higher rates. Eventually, either the weakness of the economy or the weakness of inflation – and sometimes both – has forced them to back off.
The third is that the current state of the economy favours the five MPC doves rather than the three hawks. Households are spending less, the housing market is weak, new car registrations have plunged and wage growth has fallen back, even though more people are in jobs. The third is that the state of the economy favours the five MPC doves. Households are spending less, the housing market is weak, new car registrations have plunged and wage growth has fallen back, even though more people are in jobs.
On balance, the arguments in favour of leaving rates where they are look more compelling than the arguments for raising them. No question, though, that the announcement of the 5-3 vote took the City by surprise and led to a stronger pound on the foreign exchanges. Given the current political instability, the Bank will welcome that. On balance, the arguments in favour of leaving rates where they are look more compelling than the arguments for raising them. No question, though, that the announcement of the 5-3 vote took the City by surprise and led to a stronger pound – if only briefly – on the foreign exchanges. What the Bank would really like would be a situation where the threat of higher rates leads to a firmer currency, lower import prices and weaker inflation. That would obviate the need for an actual rate increase.