Carney right to say hang fire for now on raising interest rate

Comment Martin Flanagan

There may have been an unusual three rate rebel hawks on the Bank of England’s monetary policy committee (MPC) earlier this month, but they have not persuaded governor Mark Carney that they are right.

Delivering his delayed Mansion House speech, the governor – rightly in my view – said now was not the time to be raising interest rates. Yes, inflation has been rising steadily, but not to unconscionable levels yet. And we have stagnant wage growth, meaning the cost of living for most people has risen, allied to deep political uncertainty surrounding both the UK Government and the Brexit negotiations.

Even just a quarter-point rate rise could do both practical and psychological damage to consumer spending, the latter being the UK economy’s only real succour amid mixed signals on business investment as we approach this Friday’s anniversary of the EU referendum vote.

I think this is why the rate rise urged by MPC members Ian Mccafferty, Michael Saunders and Kristin Forbes would be hasty. Not unexpectedly, sterling sank on the governor’s comments yesterday, off 0.4 per cent against the dollar and the euro as markets took the view that the prospect of a summer or autumn rate rise following the hawks’ fluttering of wings has receded.

Having said that, Mr Carney only has one vote on the MPC, and it will be interesting to see whether more doves defect to the rate rise cause as the next three or four months unfold.

The governor wants to see if other components of demand take up the slack of fragile consumer confidence; whether average earnings running at about 2.1 per cent, way below inflation of near-3 per cent, begin to firm; and how the $64,000 question – the Brexit negotiations – pan out. He diplomatically did not cite the UK’S parlous political state – an unsettling twilight zone – but then it hangs so heavily in the air he didn’t need to.

Wait-and-see is not exactly a crimson pirate of a strategy. But sometimes doing nothing is better than making a wrong move. If it works, it can be seen later as masterly inactivity. I think that is where we are on rates.

Monetary policy has only gone one way since 2009. Inflation is rising, and we have not had three MPC members voting for a rate increase in six years. But in the greater scheme of things we should hold fire.