The great interest rate debate

Tony Ward

January 26, 2016

Tony Ward is chief executive of Clayton Euro Risk

So where are we on UK interest rates? Not so long ago, as recently as the back-end of last year, pundits were of the opinion that a rate rise was on the cards and it made sense for the Bank of England’s Monetary Committee to raise rates sooner rather than later. Some were forecasting a rise as soon as the first quarter of 2016. This was in spite of inflation remaining at record low levels.

Fast forward to today and it’s a different story.

The first estimate for the final quarter of 2015 published by the Office for National Statistics this week is expected to show that GDP grew by just 0.4%, the same as the third quarter, confirming a weak second half of the year.  And with a predicted weak start to 2016, many analysts are unsurprisingly pushing out expectations of when interest rates will climb. Markets now don’t expect a first move until well into 2017, with rates increasing at a slow pace after that.

The Bank of England certainly concurs. Last week its governor Mark Carney appeared to agree with market expectations, suggesting that rates will remain low “for longer”, whatever that means. However I can remember how bearish the Bank seemed to be just in August this year when he suggested that a rate hike could be as early as year-end.

So much for Mr Carney’s penchant for forward guidance. I’ve never been a big fan as regular readers of my blog can attest: it just doesn’t seem to work. The entire point of forward guidance is to influence markets and signal monetary policy without having to actually do anything. However, how has this worked when we have some indicators mismatched with others – low unemployment but low inflation/wage growth?

I admit that we have become accustomed as borrowers, businesses and banks to low interest rates and at some point it is worth a reminder that this is not the norm. But raising rates now or even predicting they could go up soon is not sensible. We must face the fact that there are still huge uncertainties about emerging market economies’ growth prospects, volatility in financial markets and geopolitical risks – all of which could have an impact on the UK economy. Personally I believe the UK is better placed than most to deal with global instability and agree with the chancellor George Osborne, who suggested that this country was a ‘chink of light cutting through the global gloom’.

Let’s celebrate that but not be complacent.

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