Next rate rise should only be taken with caution
Ahead of the Bank of England’s decision this week, Donald Brown, head of private clients at Brewin Dolphin Edinburgh, warns over the knock-on effects of a rise
Seldom has a Bank of England monetary policy committee meeting been more anticipated than the one approaching on Thursday. Could we see an interest rate rise for only the second time in a decade? Speculation has been rife since June’s meeting, when the voting scales shifted from 7-2 to 6-3 in favour of the central bank’s rate staying at 0.5 per cent. With the bank’s chief economist, Andy Haldane, moving to the “for” camp, the suggestion was that the groundwork was being laid for a rise in August.
If that was the message the Bank of England was indeed trying to get across, it worked in the immediate aftermath. A mid-july poll of City analysts found more than three-quarters (77.5 per cent) of respondents expected a hike.
Only three months ago it was almost inverted, with around two-thirds of those interviewed by the same survey saying they anticipated no change.
This followed a plethora of economic data which, on the face of it, put even more weight behind the case for a rate rise. The UK’S inaugural monthly GDP report showed growth of 0.3 per cent in May, led by a strong services sector and helped by a rebound in construction and manufacturing from their earlier doldrums.
What’s more, back in May, data from the Office for National Statistics pointed to a 0.4 per cent decline in productivity. This further underlined the bank’s claims that the economy was hitting a glass ceiling and strengthened the case for a rate rise, as it tries to bring inflation closer to the official 2 per cent target.
However, some commentators have pointed to the fact that, although the economy is indeed growing, it’s not quite at the rate associated with rate rises. The purchasing manager’s index, a closelywatched measure of output, averaged 54.2 in the second quarter of this year, well below the level that usually triggers talk of upping the base rate.
Likewise, the EY Item Club’s summer forecast said it expects UK GDP to grow by 1.4 per cent in 2018, the weakest performance since 2012.
Hopes of an increase also took a blow with June’s consumer price index remaining unchanged at 2.4 per cent and average weekly earnings growth slowed to 2.5 per cent in the three months to May.
Those figures appear to have stultified many commentators’ previous enthusiasm for change. In any case, at this stage I fear any move in the UK’S official interest rate would be rather anti-climactic. Although the FTSE 100 is in near-record territory, markets already appear to be factoring in an increase to 0.75 per cent – whether it arrives in August, September, or even later this year.
It would be fair to say that the Bank of England and long-suffering savers are as keen as each other to see an increase to the official rate. But, if there is any change, it will be minimal and will take some time to make its way through to savings products.
However, for a multitude of reasons, some of which I’ve mentioned, the bank will be cautious about increasing the rate. In the short term, therefore, there’s unlikely to be too much to get excited about from a saver’s perspective.
Instead, the bigger story of a rate increase
DONALD BROWN would be its likely impact on the beleaguered high street. Put simply, there is an entire generation of people in the UK who have never experienced a rising interest rate – and it could be a shock for them.
If consumers suddenly wake up to find they have less spending power after years of being subsidised by savers, the effect on retailers could be quite dramatic. If they have to spend more on repaying short-term debt or the monthly repayments on their variable mortgage go up, that means less disposable income. You don’t need to be an economist to know that less disposable income means less money to spend in the shops, which need it more than ever.
Many voices are calling for a rate rise, but the Bank of England still needs to proceed with caution. Not only could it add to a summer of discontent for many retailers, it could come as a serious surprise to people who have never known its likes before.
“The bigger story of a rate increase would be its likely impact on the beleaguered high street”