Just when will rates rise?

Interest rates may not rise as soon as you think, says Merryn Somerset Webb.

Last week, the governor of the Bank of England, Mark Carney, suggested that interest rates in the UK might rise sooner than the market expects. You can see why he might feel the need to flag this up. UK GDP has grown rather faster than expected recently: in the last quarter, the economy grew by 3.1% compared to a year ago.

But to think that interest rates will soon rise, you also have to think that growth is likely to continue to surprise on the upside.

That, as anyone on the MoneyWeek cruise with me this week (we've done Venice and are heading for Dubrovnik as I write) will know, is not a given. Why? Bank lending, as James Ferguson has been explaining.

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In a modern economy that is genuinely recovering, you'd expect to see lending rising. But despite the impression given by the banks' PR campaign that just isn't the case. Net mortgage lending has risen slightly since the financial crisis, but all other lending hasn't. Instead, it has been falling.

That, says James, tells us that our banks aren't yet completely fixed (a view shared by some of the participants in our Roundtable this week). Banks with clean balance sheets lend new money, banks without them don't.

If you are prone to investing in banks which I am very firmly not you might note that Lloyds and RBS are contracting their non-mortgage lending the fastest. That suggests they aren't nearly as healthy as their share prices might suggest.

Normally, a fall in bank lending would mean a fall in broad money supply and hence in nominal GDP. This hasn't happened in the UK. Instead, we have rising GDP. Why? Quantitative easing (QE) has made up the difference we have printed just enough money to keep broad money supply more or less constant.

The problem for Carney at least is that UK QE is supposed to be over, but that bank lending is still falling. This suggests a contracting money supply something that means lower, rather than higher, growth.

In turn, that rather strongly argues against an immediate increase in rates as doa number of other factors, whether theybe prudent or politically motivated.

But what, you may be thinking, of the housing market? There appears to be a consensus that the UK is in the throes of yet another out-of-control housing bubble. So surely we must raise rates regardless of growth to burst it sooner rather than later?

Not so. London and some of the southeast might be in the midst of a semi-hysterical housing bubble (or possibly nearing the end of one). But, as I said a few weeks ago, the rest of the country probably isn't.

And leaving you to mull over that happy news, I'm off to join the rest of our party for a glass of champagne on the lido deck.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.