Waiting for a rise in interest rates

Bank of England governor Mark Carney has kept everyone guessing as to when interest rates will rise.

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

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".

Recommended

What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
Why we should scrap the Budget
Budget

Why we should scrap the Budget

The yearly Budget, big set-piece of British politics, encourages the very worst from the government, says Matthew Lynn.
24 Oct 2021
Green finance is set to be the most powerful financial repression tool yet
Bonds

Green finance is set to be the most powerful financial repression tool yet

The government has launched its “green savings bond” that offers investors just 0.65%. But that pitiful return is in many ways the point of “green” fi…
22 Oct 2021
Equities are not a good inflation hedge
Economy

Equities are not a good inflation hedge

Institutional investors are definitely now worried about inflation. But they're not yet worried enough to flee to cash, says John Stepek
22 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021