As I See It

Bank is taking big risk by delaying rate rise

Terry M outdoor 5If only it was as easy to bet on the horses as it is to back the outcome of a meeting of the Bank of England’s monetary policy committee (MPC). Every month it has met for six and a half years and each time it has decided to keep the interest rate unchanged. Now, I wonder what odds I will get on there being no change next month?

Ironically, it was looking odds-on earlier this year that we would have had a rise by now. Governor Mark Carney (pictured below) was ready to stake his money on an uplift, but he’s earning a reputation as the Kenny Dalglish of the City: “maybe yes, maybe no.”

Now we’re told a rise could be delayed until 2017. Crikey, that’s a lot of tea and biscuits for the MPC to get through as it meets around the polished table in Threadneedle Street to contemplate some big numbers before deciding to do nothing.

In fact, this is becoming a serious issue. While the low interest rate environment is good for those with big mortgages and for businesses wanting to borrow to invest, it does hee-haw for savers. More to the point, some economists believe the time is due for a rise. Those who support lone MPC wolf Ian McCafferty’s call for an increase are arguing that we may be forced into an even bigger rise when the decision is taken to do so.

One of those who has been calling for  a rise, James Sproule, chief economist at the IoD, says that with strong consumer confidence and wages on the up, the arguments against raising interest rates from the current exceptionally low level are falling away. The IoD has been calling for over a year for the Bank to start the process of raising rates and says the need to “normalise” remains.

Mr Carney and his MPC dovish members deserve some credit for their caution. Earlier this year the slowdown in China that has now taken hold was not anticipated and surveys point to a slower rate of growth at home as a result, suggesting the need not to knock precariously positioned companies off their perch.

But Mr Sproule is concerned that consumer debt is beginning to rise and warns that the UK is all too familiar with consumer debt getting out of control. He argues that without gradual rate rises to dampen “debt-fuelled exuberance”, borrowing poses a risk to future economic growth and stability.

Mark CarneyWhen Mr Carney arrived at the Bank in 2012, just as the recovery took hold, he began talking about a broader range of metrics being used for assessing the direction of interest rates and the control of inflation. There has not been much evidence to show it is employing these factors to any great extent.

Once too often he has changed his mind about the timing of any rise and instead seems to be swept along by those famous headwinds that blow around the City. No wonder Calum Bennie, savings expert at Scottish Friendly, described the governor as the boy who cried wolf.

There are too many excuses for doing nothing. As one analyst said today, not long ago the Bank was saying that inflation wasn’t picking up because of the low oil price. Now it’s emerging markets. As far as a target date for a rate rise is concerned, 2017 has replaced ‘end of 2015’ as the firm favourite.

The danger, according to some analysts, is that the Bank may look back and regret not acting sooner.


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