Waiting for a rise in interest rates

When will interest rates rise again in the UK? Not as quickly as the market had expected, judging by the Bank of England’s latest quarterly inflation report. Governor Mark Carney said that Britain’s economy was returning to “a semblance of normality”.

The Bank’s forecasts for UK growth improved a bit – GDP growth is set to come in at 3.5% in 2014 and 3% in 2015, it now believes. It also cut its estimate for the overall amount of ‘spare capacity’ – which basically means the level of ‘give’ left in the economy – to 1% of GDP.

However, the Bank reckons there is more slack in the labour market than it had previously thought. It expects wage growth to come in at just 1.25% this year, from 2.5% previously.

Meanwhile, official figures showed the unemployment rate falling again, to 6.4% in the quarter to the end of June, but also the first drop in earnings since the crisis in 2009.

What the commentators said

Anyone expecting an interest-rate hike in 2014 looks set to be disappointed, said UKForex’s Jake Trask. “The tone in the press conference was very dovish.”

Carney said that even if all the spare capacity in the economy was eliminated overnight, the appropriate level of interest rates would be close to where it is now, due to problems such as high household indebtedness and the weak eurozone recovery.

But don’t pay too much attention to his dovish noises, said Capital Economics. Carney has changed his tone before; in June he was talking up rates. The bottom line, as Larry Elliott noted on Theguardian.com, is that the Bank “is in the dark about the true state of the economy”.

The report said “there is a wide range of views” in the Monetary Policy Committee about the degree of slack in the system – the measurement of which is hardly an exact science.

Witness also the “chopping and changing” by Carney in recent months when it came to issuing ‘forward guidance’, and establishing which indicators would be most important in deciding the path of interest rates, said Edmund Conway in The Times.

People are waiting with bated breath for supposedly “all-seeing, all powerful” central bankers to tell us what’s going on, and to hint at when interest rates should rise. But we should all have learnt from their failure to do anything about the global financial crisis that “central bankers are about as clueless as the rest of us”.

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