Carney sticks to his guns on rates

published 15 May 2014

Despite stronger British jobs data, with unemployment at its lowest levels since 2009, the Bank of England downplayed growing speculation that it was planning a hike in interest rates early next year, or even before Christmas.

Instead, it released data on projected interest rates in its latest inflation report, which heavily implied there would be no change until the second quarter of 2015.

However, Mark Carney emphasised in his press conference that rising business investment showed the recovery was picking up pace. The BoE also upgraded its growth forecast for 2015 to 2.9% (from 2.7%). This year's forecast was unchanged.

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What the commentators said

During the same three-month period, unemployment "fell by 133,000". One of the key reasons behind this was the growth in self-employment, with almost one in seven people working for themselves, "the highest level since records began in 1971".

However, other commentators felt that the picture was not as bright as employment alone suggested. "Real wage growth is back, but it's weaker than we'd expected," said Peter Spence in City AM.

Yes, total wages rose by 1.7%, slightly higher than the inflation rate of 1.6% but when bonuses are excluded, the rate of wage increase falls to 1.3%, which "is still lower than headline inflation and less than the 1.4% increase reported last month". This means that for most people wages are still falling in real terms.

The overall tone of the report and the press conference were "dovish", said Samuel Tombs of Capital Economics. Indeed, the monetary policy committee thinks "the amount of spare capacity in the economy has only reduced slightly since February's Inflation Report".

Carney also emphasised that "monetary policy was not the right tool to use to cool the housing market", reducing the chances of the central bank being pushed into a rate rise simply to try to cool house price inflation.

As a result, Capital Economics expects interest rates to stay "on hold until the second half of next year, later than the market and most economists expect".

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.