In­ter­est rate rise closer than mar­kets think, hints BoE

The Daily Telegraph - Business - - Front Page - By Tim Wal­lace

THE Bank of Eng­land sur­prised mar­kets by in­di­cat­ing that in­ter­est rates could go up sooner and more quickly than ex­pected, as it said hikes may be needed to keep in­fla­tion un­der con­trol.

Mark Car­ney and the Mon­e­tary Pol­icy Com­mit­tee (MPC) kept in­ter­est rates on hold at 0.25pc, but said in­vestors did not fully ap­pre­ci­ate that rates could rise “over the com­ing months”.

Ster­ling rose by 1pc against the dol­lar to $1.3341 as a re­sult.

The MPC voted by a mar­gin of seven mem­bers to two against changing rates, ar­gu­ing that the Bank of Eng­land should be sup­port­ing eco­nomic growth and em­ploy­ment at a time of eco­nomic un­cer­tainty. In­fla­tion is cur­rently run­ning at 2.9pc, well above the Bank’s tar­get of 2pc, but is ex­pected to peak soon, mean­ing pol­i­cy­mak­ers do not feel com­pelled to step in with higher in­ter­est rates to con­trol prices.

“The cir­cum­stances since the ref­er­en­dum on EU mem­ber­ship, and the ac­com­pa­ny­ing de­pre­ci­a­tion of ster­ling, have been ex­cep­tional,” said the min­utes of the meet­ing. “The MPC’s re­mit spec­i­fies that, in such ex­cep­tional cir­cum­stances, the com­mit­tee must bal­ance any trade-off be­tween the speed at which it in­tends to re­turn in­fla­tion sus­tain­ably to the tar­get and the sup­port that mon­e­tary pol­icy pro­vides to jobs and ac­tiv­ity.”

The min­utes also noted that the bal­ance of the trade-off could change in the near fu­ture. “If the econ­omy fol­lows a path broadly con­sis­tent with the Au­gust In­fla­tion Re­port cen­tral pro­jec­tion, then mon­e­tary pol­icy could need to be tight­ened by a some­what greater ex­tent over the fore­cast pe­riod than cur­rent mar­ket ex­pec­ta­tions,” the MPC meet­ing said. If slack in the econ­omy is used up and in­fla­tion rises, “some with­drawal of mon­e­tary stim­u­lus is likely to be ap­pro­pri­ate over com­ing months in or­der to re­turn in­fla­tion sus­tain­ably to tar­get”.

Econ­o­mists be­lieve this could mean rates will rise this year. “If the econ­omy con­tin­ues to hold up, and there are clearer signs that wage growth is build­ing, the first hike could come some­what ear­lier than we had en­vis­aged,” said Paul Hollingsworth at Cap­i­tal Eco­nomics.

‘Mon­e­tary pol­icy could need to be tight­ened by a some­what greater ex­tent than mar­ket ex­pec­ta­tions’

MARK CAR­NEY was ac­cused of be­ing an “un­re­li­able boyfriend” by Pat McFad­den MP back in 2014.

At the time the crit­i­cism was lev­elled at the Bank of Eng­land’s shift­ing guid­ance. It had sug­gested that in­ter­est rates could rise in 2014. And then 2015. And then 2016. And yet rate hikes came there none. In fact, in­ter­est rates are now lower than ever. So, how should we take the lat­est hints that rates could rise? Is the Gover­nor se­ri­ous, or is some­thing more com­pli­cated go­ing on?

Some an­a­lysts have sug­gested the Bank is try­ing to per­suade the mar­kets rates will rise to boost the pound, which will help re­duce in­fla­tion and thereby negate the need for a rate rise. It’s quite a com­pli­cated game. And the key to its suc­cess is the ex­tent to which the mar­ket feels it can trust the Bank. The trou­ble is, the mar­kets have been let down sev­eral times. In 2013 Car­ney ar­rived in Bri­tain and said he would con­sider rais­ing rates when un­em­ploy­ment fell be­low 7pc. He thought it would take three years, but in fact it took only six months. Un­em­ploy­ment is now 4.3pc, but rates are lower than four years ago.

In Oc­to­ber 2015, the Gover­nor told house­holds that the Bank was “fo­cused… [on] rais­ing in­ter­est rates” and that they should pre­pare for higher bor­row­ing costs. Three months later he ruled it out, say­ing in­fla­tion was lower than ex­pected and so there was no need to tighten pol­icy.

Pol­i­cy­mak­ers then sig­nalled that they could raise rates around a year later to pre­vent the econ­omy from over­heat­ing. Any move in that di­rec­tion was thrown off course by the Brexit vote in June 2016; the Bank re­sponded to this by cut­ting rates the fol­low­ing Au­gust. By Oc­to­ber last year, MPC mem­ber Gert­jan Vlieghe ac­knowl­edged that rais­ing rates would en­sure in­fla­tion was on tar­get at 2pc in 2019. But he warned that the price in terms of lost eco­nomic growth and jobs was too high, so rates should stay on hold for the fore­see­able fu­ture. Six months later, rate rises were back on the agenda. Three MPC mem­bers voted for a hike in June and chief econ­o­mist Andy Hal­dane said he con­sid­ered fol­low­ing suit.

The Gover­nor said ris­ing busi­ness in­vest­ment could show the econ­omy was per­form­ing well and al­low for rates to rise. The pound rose. But in Au­gust the MPC voted to hold rates and cut growth fore­casts. The pound fell. Yet now the MPC is talk­ing once more about the po­ten­tial need to raise rates. What should mar­kets think?

An­a­lysts won­der if this is a tac­ti­cal ploy. HSBC be­lieves cen­tral banks are us­ing words rather than rate changes to push the cur­rency up, test­ing the ef­fect on in­fla­tion and growth in a way that is eas­ily re­versible be­fore mov­ing on to ac­tual hikes.

BNP Paribas sees lit­tle ben­e­fit in a sin­gle rate hike and no prospect of a sus­tained se­ries, leav­ing its an­a­lysts with the view that this is a bluff. Mar­kets moved on the com­mit­tee’s state­ment, so it had some short-term ef­fect at least. But poli­cies con­ducted by means of rhetoric may only work so long. Soon in­vestors may start to sus­pect the Gover­nor is bluff­ing.

Even this lat­est an­nounce­ment has only pushed the mar­ket’s ex­pec­ta­tion of a rate rise this year to 55pc. That is twice the level at the start of the week. But it also sug­gests that in­vestors are far from con­vinced – and per­haps rather con­fused.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.