Mixed signals on interest rates

For anyone wanting to know when interest rates will rise, it has been another confusing week.

It's been another confusing week for anyone wondering when UK interest rates will finally rise again. Inflation data was surprisingly weak in July the consumer price index (CPI) rose by just 1.6% on last year, from 1.9% in July.

However, minutes from the latest Bank of England meeting showed that opinions were split for the first time since July 2011. Not one, but two of the nine Monetary Policy Committee (MPC) members voted to raise the key interest rate by 0.25% at the meeting on 7 August.

The two were concerned that wage growth is a lagging indicator, and that if the Bank waits for currently weak pay figures to improve, it will already be too late to curb inflation.

What the commentators said

Lower costs for fuel and raw materials, along with "tight control of pay", are keeping a lid on manufacturing costs, while the strong pound is capping import prices.

Certainly, subdued inflation and wage growth suggest we won't have higher rates before 2015 but the MPC minutes are more hawkish, implying we can't rule out a rise this year, said UKForex'sAlex Edwards. It all adds up to "a confusing message to investors, households and business owners".

The upshot, reckoned James Knightley of ING, is that we should pencil in a hike in February. The chances are that as well as weak wage data, ongoing fears of another downturn in the eurozone, Britain's biggest trading partner, will prompt most MPC members to opt for the status quo for now. The minority of two is unlikely to grow for some time.

It wasn't just the data giving mixed signals this week. Bank of England Governor Mark Carney appeared to move the "goalposts yet again", as UBS's Geoffrey Yu put it. Last week, he sounded dovish (less likely to raise rates) when he cut wage growth forecasts and said they were a key indicator. But in a weekend newspaper interview he said rates could rise before earnings growth had caught up with inflation.

And it's not his first apparent about-face, as Elliott noted. The markets could be forgiven for telling him that "a period of silence on your part would be welcome".

Recommended

What's behind Britain’s looming energy crisis
Energy

What's behind Britain’s looming energy crisis

Global natural gas prices have soared as resurgent demand collides with supply disruptions. The UK is especially vulnerable and could be heading for a…
24 Sep 2021
Why is the UK short of CO2 and what does it mean for you?
UK Economy

Why is the UK short of CO2 and what does it mean for you?

The UK is experiencing a carbon dioxide shortage that could lead to empty shelves in supermarkets. Saloni Sardana explains what’s going on and how it …
21 Sep 2021
How high energy prices are driving up food prices too
Soft commodities

How high energy prices are driving up food prices too

High energy prices aren’t just affecting our heating bills, they’re making food more expensive, too. Saloni Sardana explains what’s going on.
21 Sep 2021
Warsaw and Stockholm: the unexpected new threats to the City of London
UK stockmarkets

Warsaw and Stockholm: the unexpected new threats to the City of London

London has seen off challenges from Frankfurt and Paris, but two other booming financial centres are a bigger threat, says Matthew Lynn.
19 Sep 2021

Most Popular

Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021