Will Carney raise interest rates at last?
The governor of the Bank of England signals that a rise in interest rates may finally be on the way.
"Not more forward guidance, surely," says Alistair Osborne in The Times. "Hasn't Mark Carney tried that often enough?" In 2013 the governor said the Bank of England would start thinking about raising interest rates when unemployment fell below 7%. Now it's at 4.3%, but rates never rose. Before the EU referendum there were two other occasions when he appeared to signal a rise would come soon. Then he cut them after the vote.
No wonder, then, that many were sceptical last week when the Bank struck an unexpectedly hawkish tone. A majority of members of the Monetary Policy Committee now apparently thinks that "some withdrawal of monetary stimulus is likely to be appropriate in the coming months". This was enough to bring market expectations of the first rate hike forward from 2019 to March 2018. Sterling bounced to around $1.36, its highest level since the Brexit vote.
The renewed discussion about raising rates just underlines what a "blunder" last year's post-vote cut from 0.5% to 0.25% was, as Neil Collins notes in the Financial Times. It was borne of sheer "panic". Had the bank refrained from doing so, "would anyone be arguing now that 0.25% was a more appropriate rate"? The economy certainly seems healthy enough to cope with the reversal of the 2016 cut. Inflation is at a joint five-year high of 2.9% just 0.1% below the level at which the governor has to write to the chancellor to explain what he is going to do about missing the 2% target by a whole percentage point. The data remains relatively healthy and the labour market is growing ever tighter.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Yet "the link between unemployment and wages has broken down", says Chris Giles, also in the FT. Usually, once unemployment reaches a certain level, wages take off. But this time around, "however tight the labour market appears to get, wages seem stuck at growth rates of about 2%". Still, that probably won't continue much longer, reckons Jeremy Warner in The Sunday Telegraph. Weak wage growth is due to globalisation and, in some cases, improvements in technology.
Consider compliance, which has seen "myriad jobs" created because technology allows modern finance to be "monitored as never before". But compliance has no economic value and has depressed overall productivity and hence wages. Still, the link between wage growth and labour-market tightness must kick in at some point. And with the public-sector pay cap gone, that point may be now. The unions "scent blood" from a weak government. "Once the dam is breached in the public sector, above-inflation pay rises will flow quickly into the wider economy."
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
-
RICS: Housing market continues to strengthen but 2025 could be challenging
The latest survey by the Royal Institution of Chartered Surveyors reports a resilient UK housing market, but warns of headwinds next year
By Ruth Emery Published
-
Bitcoin price one of the most-asked questions on Alexa - here's how to buy the cryptocurrency
According to figures from Amazon, which cover September 2023 to November 2024, pop star Taylor Swift and Bitcoin were named among the most popular Alexa queries of 2024
By Chris Newlands Published