Is a rate rise finally on the cards?

It's high time interest rates were once more on the rise. Is the Bank of England finally coming around, asks Andrew Van Sickle.

850-Carney-634

Mark Carney: Unconcerned, but it's high-time he moved

Last August, after the EU referendum, the Bank of England halved interest rates to 0.25% and restarted quantitative easing (QE). The "folly" of this "panicky" move "may be starting to sink in", says Neil Collins in the Financial Times. Last week, three of the Bank of England's Monetary Policy Committee (MPC) members voted to raise interest rates. While rates stayed at 0.25%, with the MPC down to eight members rather than the usual nine (new recruit, academic Silvana Tenreyro, has since joined), the vote was very tight indeed.

Quite right too. The annual rate of consumer price index (CPI) inflation is at a four-year high of 2.9%, above the Bank's predicted peak for 2017. The old retail price index which includes housing costs is up to 3.7%. Note that the three MPC votes to hike came from "external members less susceptible to Bank groupthink", as Alistair Osborne puts it in The Times. Loose money, along with sterling's rise, is fuelling the jump in inflation, along with "a worrying increase in household debt".

Unsecured consumer credit is set to hit levels not seen since the 2008 crash, says Shane Hickey in The Guardian. Credit-card borrowing is rising at its fastest rate in 11 years. Overall consumer-credit growth (excluding mortgages) hasn't risen this fast since the pre-crisis peak, and household savings are back to their pre-crash low. Throw in solid growth, and last August's cut looks like "an overreaction", says Osborne. It has added to our private debt pile, and also gives Carney very little room for manoeuvre in case the economy weakens again.

Judging by his Mansion House speech this week, Carney is unconcerned. He argued once again that rates should stay put until the impact of Brexit is clearer. And a recent slowdown in consumer spending, which comprises the lion's share of GDP, suggests rates could stay where they are, says Liam Halligan in The Sunday Telegraph. Yet even if they began climbing, they would still be "heavily negative" in real (after-inflation) terms. Also, it's easy to overstate the impact: only a third of households have a mortgage, and more than half of those are on fixed rates.

The bigger issue, however, says Halligan, is that years of QE and negative interest rates have skewed Western economies beyond recognition, sustaining "zombie companies", and forcing investors into "bubbly crash-prone assets" to find yield. Meanwhile "business owners are so spooked by outlandish monetary policy that they're not investing." A rate rise by the Bank would be a sign of getting back to normal, so it should boost confidence. Time to move "if only once" for now.

Recommended

Greensill, Cameron and the return of Tory sleaze
UK Economy

Greensill, Cameron and the return of Tory sleaze

The collapse of Greensill Capital threw a spotlight on political lobbying when it emerged that former PM David Cameron had been fighting its corner. J…
17 Apr 2021
Recovery Loan Scheme: the latest government aid package for small businesses
Small business

Recovery Loan Scheme: the latest government aid package for small businesses

The Recovery Loan Scheme will help companies weather the pandemic
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021