From unreliable boyfriend to boy who cried wolf

Bank of England’s credibility is on the line if it does not increase interest rates this year after multiple hints, says Tim Wallace

The Bank of England has not yet raised interest rates, but it might feel like it for house hunters: the best mortgage deals are evaporating as lenders can see which way the wind is blowing.

Policymakers are cheerily discussing the prospect of a hike which could come the week after next – multiple hints and self-described “signals” have led the market to price in a rate rise before it even happens.

If it happens, it would be the first increase since Covid struck and the base rate was slashed to a record low of 0.1pc.

Thursday night served the latest hint, from Huw Pill, the hawkish new chief economist, who indicated an uptick is very much on the cards.

“I think November is live,” he told the Financial Times, describing a rate rise decision as “finely balanced”.

But while the Monetary Policy Committee plays a game of will-theywon’t-they, financial markets have already moved, pricing in a rise to 0.25pc on November 4 plus more increases to 1pc or higher by the end of 2022.

And that has already trickled down to consumers, with banks pricing their loans from financial markets. Banks including Barclays, Natwest, HSBC and Platform, part of the Co-operative Bank, have raised rates on some of the best deals.

Earlier this week Moneyfacts data showed the number of fixed-rate mortgages at below 1pc had fallen from 131 to 116 over the past fortnight.

It shows the power of central bankers’ words, as well as their actions.

Pill is only the latest to offer his food for thought.

Michael Saunders, an external member of the MPC, told The Sunday Telegraph this month that rates could rise “significantly earlier” than was expected at the time.

Economists jumped in their seats. While sceptical the Bank would really start tightening so rapidly, given it is still printing money under quantitative easing, repeated MPC comments have forced them to update forecasts and accept that officials really are looking at increasing the base rate this year.

Andrew Bailey, the Bank’s Governor, reinforced the message last Sunday with a warning he “will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations”.

While the loud speakers get the attention, not all policymakers agree – and some of them are the quieter ones. It raises questions over if a rate rise will really be voted in and, if not, how much of a corner the Bank may have backed itself into.

Three of the MPC’S nine members are considered to be “doves”, a label which typically indicates they are cautious to raise rates, favouring growth-boosting stimulus over inflation-combatting tightening.

One, Jonathan Haskel, has not spoken out and another, Silvana Tenreyro, has indicated she doesn’t want higher rates.

The third is Catherine Mann, a newcomer like Pill.

But unlike him, Mann has signalled she is happy to hold off hiking rates as inflation of above the 2pc target is likely “transitory”.

Critically she also said financial markets are already putting the Bank’s concerns on prices into action by charging higher interest rates, achieving tighter policy without officials having to act.

“This means that there is a lot of endogenous tightening of financial conditions already in train in the UK. That means that I can wait on active tightening through a Bank Rate rise,” she said.

This points to one of the key policy developments of the past decade: forward guidance.

Policymakers have always guided markets to some extent, but after the financial crisis it came to be seen as a crucial tool for managing the economy.

Active “forward guidance” was introduced in an effort to reassure markets, businesses and families that interest rates would not rise for a long time.

For instance, when Mark Carney joined the Bank as Governor, he stressed that rate rises would not be considered until unemployment had fallen significantly. It was intended to take the pressure and speculation off the MPC’S then monthly meetings, and keep longer-term rates down in financial markets.

If markets understand how the Bank will react to different circumstances, they can set interest rates accordingly

‘The most important thing is the MPC’S decision-making is transparent and a change of direction is explained’

without officials needing to act, or lenders and borrowers being taken by surprise when they do.

This time the reverse is happening. However, the policy is not risk-free.

In Carney’s case, it earned him the reputation of an “unreliable boyfriend”. Unemployment plunged far more rapidly than he – or anyone else – anticipated, forcing him to update the guidance.

Today’s hazard is that if the Bank does not raise rates this year, it risks looking like the boy who cried “wolf ”. Credibility is key for a central bank that wants to avoid carnage in markets and be able to guide the economy.

Any failure to tighten now has to be carefully explained, says Andrew Goodwin at Oxford Economics.

“The most important thing is that the MPC’S decision-making is transparent and that any change of direction is clearly explained.”

Pill’s comments appear to confirm November’s meeting will lead either immediately to a hike, or at least tee one up for December. His bigger nudge to markets may be his statement that the UK also does not “need to go to a restrictive stance”.

That could give traders pause for thought when betting that rates will shoot up to 1.25pc over the next year

– a level not seen since 2009.

Would-be homebuyers would get some relief, too, as they suddenly face higher prices and mortgage costs.