Having reduced interest rates over the summer, the Bank of England last week confirmed it’s no longer planning to cut again. That’s a good call, not least because the original shift down was anyway a mistake.
After rates were reduced from 0.5pc to a record low of 0.25pc in August, following the UK’s referendum to leave the European Union, Bank Governor Mark Carney indicated they could fall even further. The Monetary Policy Committee now admits the UK economy is significantly stronger than it had expected in the wake of the Brexit referendum. Ergo, such “forward guidance” of even lower rates has expired.
“To retain credibility, it’s important central banks don’t claim to know more than they in fact do”. So said Former Bank of England Governor Baron (Mervyn) King in his recently published book, The End of Alchemy. Does King’s successor agree? In August 2013, a freshly-appointed Mark Carney, under his new “forward guidance” policy, declared the Bank would finally raise interest rates when UK unemployment, then 7.8pc, fell below 7pc.
Almost three years on, after faster than expected growth, unemployment has fallen to 5.1pc, yet the bank rate remain at 0.5pc – where its been since being slashed in the aftermath of the 2008 Lehman Brothers collapse.
Back in mid-July, there was much febrile speculation UK interest rates would finally start rising before the end of this year. Amidst signs of stronger US growth, and predictions the Federal Reserve would raise borrowing costs over the next few months, it was widely assumed the Bank of England would follow suit.
Last Thursday, though, as the UK base rate remained at 0.5pc for the seventy-eighth successive month, speculation of a pre-year-end rate rise dissolved, as some of us predicted. Most analysts now forecast, once again, the Bank of England won’t make a move before March 2016.
Interest rates are going up! Or are they? Is the era of ultra-cheap money, on both sides of the Atlantic, about to end? Or is this renewed bout of rate-rise speculation another false alarm?
Janet Yellen, who chairs the mighty Federal Reserve, is clearly signaling a rise in US interest rates soon – a move the Bank of England would probably follow. “Prospects are favorable for further improvement in the US labor market and economy more broadly,” Yellen boomed last Wednesday.
How is the Eurozone economy doing? Given that the 18 countries sharing the single currency comprise the UK’s biggest trading partner, accounting for around half our international commerce, this is a question of major economic and political importance.
Whether the Eurozone stages a meaningful recovery over the next 12 months, stagnates, or collapses amidst a fully-blown melt-down – which remains depressingly plausible in my view – will significantly influence the UK’s economic path, determining the backdrop against which the 2015 general election is fought.
As far as most observers are concerned, Mark Carney’s speech at the Mansion House last Thursday boiled down to a single half sentence. The first rise in interest rates since July 2007 “could happen sooner than markets currently expect”, the Bank of England Governor uttered, to assembled City grandees and the wider world beyond. This sparked a frenzy of speculation that rates could start rising from their historic low of 0.5pc, where they’ve been since March 2009, sooner rather than later.
Before Thursday, the consensus expressed in bond and currency markets was that the first rate increase in almost seven years would happen early in the second quarter of 2015. Carney’s after-dinner bombshell changed that, with economists scrambling to update their forecasts.
The Bank of England is increasingly optimistic about the UK growth outlook. Britain remains on course to expand by a very punchy 3.4pc this year, Governor Mark Carney revealed last Wednesday, presenting the latest quarterly Inflation Report. Our economy, then, is now growing at its fastest pace since 2007, prior to the financial crisis. The Bank’s Monetary Policy Committee further upgraded its 2015 growth forecast, from 2.7pc to 2.9pc.
Over the next 2 and a bit years (9 quarters), UK GDP is set to rise at an annual average of no less than 3.1pc. This latest Inflation Report is among the most bullish the MPC has published since it was established 17 years ago. Britain is now moving “from a recovery supported by household spending to an expansion sustained by business investment”, according to Carney. “The economy has started to head back towards normal”.