Mark Carney, Governor of the Bank of England, said today:
Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent, and to be consistent with monetary policy continuing to provide substantial support to the economy.
There remain considerable risks to the UK outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal. The MPC will respond to these developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation.
What does that mean? I suggest one of my usual lists.
First, rate rises, if they happen, will be small. If base rate rose above 1 per cent based on this comment I would be amazed. They may well not get that far.
Second, those rate rises will be, at best, widely paced. What else does gradual mean?
Third, Brexit negotiation stress will derail this process. Which means derailment is inevitable.
Fourth, as Brexit driven inflation falls out of the system (as is likely over the next few months) this whole process could also come to an end.
And, last, QE is very unlikely to unwind, and could even recommence.
To put it another way, monetary policy is going to stay near the zero bound and any rate increase there might be (maybe in November, more likely February based on this) will be largely a token gesture so that the Bank can soon after indicate its continuing stress about Brexit without going to a zero base rate.
Whatever else I think of Carney what I am now sure about is that he is not a big risk taker, which is what serious rate rises would be.
But he is also a man who likes a gesture. And I think he's laying the plans for more than one, both of which will have vastly more symbolic than practical significance as rates rise and then fall again within the next year. I wouldn't be at all surprised if by next Autumn the base rate is 0.25%.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Could you expand on point 4: it seems to me that Brexit driven inflation has two drivers to date which are continued deficit spending and the exchange rate collapse. The second of those should come out of the data over the next 12 months. But what is the ‘process’ that you mention that will come to an end?
It reads as if the process of writing lists is what will end, but I’m sure you mean something else.
After a year or so I was suggesting Brexit inflation simply falls out of the process of calculation: it is a one off hit
Unless, of course, things get much worse on the Brexit front I.e. Very hard Brexit with no deals at all
So the fall in inflation will mean that the process that ends is those larger than normal increases in that basket of goods and services that makes up the index. Makes sense now.
Glen Frey,
Deficit spending has nothing to do with Brexit-driven inflation. It is almost entirely attributable to the fall in the value of the pound and the affect that has on the price of imports.
The cause and correlation there can be clearly identified.
It’s kind of amusing to regard a quarter percent interest rate as a ‘hike’.
I think your estimates of Carney’s intentions are probably about right.
To the retail borrower looking at credit card and loan interest in whole number double figures an odd percentage point looks trivial, but I suspect the serious impact would be in the corporate and financial sectors where they talk about leverage (you can’t beat a good euphemism) and where a 0.25% hike is recognised as a doubling of the base rate.
If Carney had mentioned the figure of one percent there would be chaos.
The central bankers are all severally terrified that if they make a move (or even so much as say the wrong thing or say the right thing carelessly, their name will be forever the one associated with the next crash.
I think they are playing Jenga.
At some point the absurdity of the present economic state of this country is going to become obvious to all which is to say that this present government has no macroeconomic policy ( Brexit being all-consuming ) , QE has made little or no difference to growth and the only reason GDP has not fallen significantly is because too many households are underwater again with debt, but this debt is not a spending binge, but simply borrowing in order to make ends meet.
[…] it should be recognised that this debt has been monetised. I agree with him. In view of what Mark Carney said yesterday I think deep down he would also agree. There is no chance that all this debt will actually be […]