Issue of the week: interest rate manoeuvres

Markets reckon a rate hike this year may finally be in the offing. But is the Bank crying wolf again?

The Bank of England last week dropped its strongest hint in a decade that it is poised to raise interest rates, said Chris Giles in the FT – setting the stage for a “nail-biting decision at the November meeting of the Monetary Policy Committee”. Members of the MPC voted by seven to two to keep rates on hold last week, but several members signalled that “unless there is a sudden string of poor data”, a quarter-point rise from the current 0.25% rate is on the cards. For most currency traders, that became a racing certainty after the economist Gertjan Vlieghe weighed into the debate. Vlieghe is known as the committee’s “uber-dove” because of his previous calls for “restraint”; news that he too is gunning for a rise sent sterling soaring. The pound leapt by 2.7% against the dollar in just 48 hours, to above $1.36 – “its highest level since the Brexit vote”.

One can understand why the Bank wants “to talk up the pound”, said Alistair Osborne in The Times. “It’s one way to put the brakes on inflation”, which has jumped to 2.9% mainly because the weak pound has made imports more expensive – “all the more painful” for most British households as wage growth is stuck at 2.1%. “What better wheeze”, then, “than to dangle the possibility of an interest rate rise – and see if the market falls for it”. Bank governor Mark Carney has “form” on that front, after all, “thanks to his legendary forward guidance”, which invariably turns out to be wrong. And last week’s hints certainly had the desired effect on the pound. Maybe the MPC really will raise rates in November. But there are plenty of reasons it could yet hold back – not least the chance of intensified “Brexit chaos”.

The current seven-to-two split on the MPC reflects a series of trade-offs, said The Observer. The Bank needs to boost economic growth, while keeping inflation under control; to maintain “post-referendum stability”, while curbing consumer debt, “which is ever delicate and close to a tipping point”. Households “might cope with a move to 0.5%”, but a “sustained move against cheap borrowing and persistent inflation” would mean “a wider rethink of ambitions” for many Britons: from rising up the housing ladder to buying a car. There’s a risk that the Bank will “lose credibility” if it “decides to hold fire”, said the FT. Yet the “more serious risk” is that “policy tightening proves premature”. After such a long period of ultra-loose policy, “no one can be sure what the effect of higher rates will be”. And “with little evidence of domestically generated UK inflation”, there is “every reason for caution”. The BOE “should be in no rush” to move.