Car­ney’s rate rise was the cor­rect de­ci­sion

The Sunday Telegraph - Money & Business - - Business - LIAM HALLIGAN Fol­low Liam on Twit­ter @liamhal­li­gan

The Bank of Eng­land has fi­nally – fi­nally! – raised in­ter­est rates. The Mon­e­tary Pol­icy Com­mit­tee on Thurs­day voted by 7-2 to in­crease the base rate from 0.25pc to 0.5pc – the first in­crease since mid-2007.

We’ve since heard howls of an­guish. Nu­mer­ous City econ­o­mists and oth­ers ben­e­fit­ing from the as­set price boom have crit­i­cised this rise. But all the Bank did was to re­verse the quar­ter point cut of Au­gust 2016, af­ter the Brexit ref­er­en­dum.

No one is say­ing that some heav­ily in­debted peo­ple, their fi­nances at break­ing point, won’t suf­fer be­cause of this rate in­crease. But just 30pc of house­holds now have a mort­gage – mak­ing the over­all econ­omy, and con­sumer spend­ing in par­tic­u­lar, far less vul­ner­a­ble to a tiny up­lift in bor­row­ing costs than dur­ing pre­vi­ous rate cy­cles. Rates, of course, are still close to rock-bot­tom – hav­ing re­turned to what was, prior to last sum­mer, a 320-year low. And there were very good rea­sons to raise rates – which is why this col­umn has ar­gued for an in­crease for many years.

In­fla­tion in Septem­ber reg­is­tered 3pc – a five-year high, and well above the of­fi­cial 2pc tar­get – with the Bank pre­dict­ing a fur­ther in­crease. Brent crude is now above $60 a bar­rel – some 20pc more ex­pen­sive than this time last year. That will fuel price pres­sures in food, trans­port, man­u­fac­tur­ing and other in­dus­trial sec­tors. And with unem­ploy­ment at a 42-year low, and the labour mar­ket tight, in­fla­tion re­mains an is­sue. The main rea­son for rais­ing rates, though, is that the 2008 fi­nan­cial cri­sis is over and there is sim­ply no jus­ti­fi­ca­tion for them stay­ing so low. Keep­ing in­ter­est rates be­low in­fla­tion – neg­a­tive in real terms – has, along with years of quan­ti­ta­tive eas­ing, warped as­set mar­kets.

Bond yields have be­come and re­main com­pressed, cre­at­ing a bub­ble in both debt and eq­uity mar­kets. No one knows how this will un­wind. Rais­ing rates grad­u­ally, let­ting the air out of these bub­bles, hope­fully be­fore they go bang, is em­i­nently sen­si­ble – the only hope, in fact, of de­fus­ing this sit­u­a­tion. Ul­tra-low rates have, mean­while, pe­nalised savers and made life much tougher for pen­sion funds and other in­sti­tu­tional in­vestors. Need­ing to match their as­sets with long-term li­a­bil­i­ties, they’ve been forced to “search for yield” in ever more risky as­sets – again, in­creas­ing the chance of a fu­ture crash.

Low rates have also kept thou­sands of “zom­bie” com­pa­nies alive – firms able only to pay debt in­ter­est, rather than clear debts them­selves. Around a quar­ter of a mil­lion strug­gling UK firms are in this sit­u­a­tion, kept on life sup­port by un­nat­u­rally low rates. Un­able to in­vest and ex­pand, they’re a ma­jor rea­son pro­duc­tiv­ity is so low – ty­ing up re­sources that should be chan­nelled into health­ier firms.

Had the Bank not raised rates, the pound could well have plunged. Gov­er­nor Mark Car­ney has been mak­ing “hawk­ish” sounds for weeks, sig­nalling rates would go up – caus­ing the pound to strengthen. That, in turn, has helped con­tain in­fla­tion by mak­ing im­ports cheaper. Hav­ing led the mar­kets on in the past, then failed to act, the Bank’s cred­i­bil­ity was on the line. Had this rise not hap­pened, sterling could have plunged sharply, caus­ing a nasty in­fla­tion spike.

As it was, the pound still fell two cents against the dol­lar dur­ing the hours af­ter the Bank’s an­nounce­ment. That’s be­cause the Bank’s quar­terly In­fla­tion Re­port and other of­fi­cial com­ments pointed to­wards a more grad­ual pace of rate rises. The Bank’s tech­ni­cal fore­casts in­di­cate it ex­pects rates to go up by an­other 75-100 over the next three years, if in­fla­tion is to drop to its 2pc tar­get rate – a less ag­gres­sive set of in­creases than was pre­vi­ously as­sumed.

Some com­men­ta­tors ar­gued it was “one and done” – with rates now stay­ing put for sev­eral years. That view was based on the Bank’s 1.6-1.7pc GDP growth fore­cast – well be­low the long-run trend, based on fresh warn­ings about Brexit.

While the Bank rightly points to “un­cer­tain­ties as­so­ci­ated with leav­ing the EU”, it has been far too gloomy on this sub­ject. For one thing, its scare­mon­ger­ing fore­cast that sim­ply vot­ing to leave the EU would cause an “im­me­di­ate re­ces­sion” was en­tirely dis­proved. UK man­u­fac­tur­ing grew strongly again in Oc­to­ber, ac­cord­ing to PMI in­dex data re­leased last week, the 15th con­sec­u­tive month of ex­pan­sion. A top BMW ex­ec­u­tive then said its UK op­er­a­tions would re­main cru­cial af­ter we leave the EU. Build­ing en­gines and cars in Bri­tain makes sense, said the Ger­man mo­tor­ing gi­ant, be­cause it sold 250,000 cars here, the UK re­main­ing one of its most lu­cra­tive mar­kets.

And what of the Bank’s fore­cast that the City could lose 75,000 jobs as a re­sult of Brexit – a warn­ing that drove nu­mer­ous head­lines? I don’t buy it. US bank JP Mor­gan said be­fore the ref­er­en­dum it would move 4,000 jobs be­yond the UK. Now it’s 1,000. Swiss thor­ough­bred UBS pre­vi­ously warned of 1,000 losses. Now it says 250.

The UK is the world’s big­gest ex­porter of fi­nan­cial ser­vices – and that won’t change any time soon. EU com­pa­nies and gov­ern­ments need the City’s deep and global mar­kets to raise cash. Fi­nan­cial ser­vices are likely to thrive af­ter Brexit, as we fo­cus more on mar­kets be­yond Europe.

This rate rise makes it more likely Chan­cel­lor Philip Ham­mond will cut stamp duty on house pur­chases in this month’s Bud­get state­ment – which would be good news. And with the UK now join­ing the US Fed­eral Re­serve in rais­ing rates, the Bank has just sig­nalled the start of a re­turn to nor­mal­ity. UK com­pa­nies, spooked by mad mon­e­tary pol­icy, have been sit­ting on cash for years, fail­ing to in­vest. That’s why last week’s small but sym­bolic rate rise, to be fol­lowed by oth­ers, will draw such cash back into the econ­omy, pro­vid­ing Bri­tain with a boost.

‘Ul­tra-low rates have, mean­while, pe­nalised savers and made life much tougher for pen­sion funds’

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