The decision on interest rates deserves more time, less talk

 
David Laws
US-MARKETS-IMF
Perhaps it’s time for a return to the more opaque approach of the past (Source: Getty)

It’s only a measly quarter of one per cent.

But in trading rooms across the City, in newsrooms across the world, and in households across the UK, people will be waiting with bated breath to see if the Bank of England’s rate-setting Monetary Policy Committee (MPC) decides to hike interest rates this week.

Why all the excitement?

Read more: DEBATE: Time for a rate rise in light of the uptick in GDP growth?

First, because increases in interest rates have become as rare as moon landings – the last was back in 2007. There are millions of mortgage holders who have literally never experienced an increase in rates.

And second, probably more importantly, because people wonder whether this first interest rate rise for a decade may mark the beginning of a long period of rising rates, which might take mortgage costs and savings returns back to more “normal” levels. And it’s true that when interest rates are moved after long periods of stability, this does tend to be the beginning of a trend.

There are plenty of reasons why policymakers might want to raise rates soon.

Unemployment is low. The economy has continued to grow, in spite of the shock Brexit vote. And inflation is a full percentage point above the two per cent target.

Over the last few months, a number of Bank of England policy-

makers have signalled their support for higher interest rates – which has raised expectations in the financial markets of a move.

Governor Mark Carney, initially cautious about a rate hike, seems to have changed his position. And among the so-called “City scribblers” who commentate on economic policy, the expectation is now that rates will be raised.

Some have argued that this will calm inflation. Others, perversely, have claimed that a rate hike will raise confidence about the economy’s strength, hence boosting investment and growth – an odd narrative if growth really does need to moderate in order to quell inflation.

The Treasury must be nervously following the evolving debate. Since 2010, the unwritten “deal” has been that the Treasury pursues an austerity drive, to get borrowing back under control. Meanwhile, the Bank of England maintains ultra-low interest rates, to offset the effects of austerity.

Philip Hammond still has work to do to fill his deficit hole, but it seems that the Bank will no longer take up the slack.

Can tensions between the Bank and Treasury now be expected? No wonder that former senior Treasury officials on the MPC (Sir Dave Ramsden and Sir Jon Cunliffe) seem least enthusiastic now about higher interest rates.

When I arrived at the Treasury in May 2010, it was Sir Dave’s bleak assessment of the fiscal choices confronting the country which was the first briefing I was required to read – no one will be more conscious of the “tight fiscal/easy money” compact that has prevailed since 2010.

And just how ready is the UK economy for a rate hike? The chancellor claimed a week ago that economic growth is “solid” – “anaemic” might be a better word. Real wages are declining, and consumer sentiment looks shaky.

Finally, the Brexit negotiations have reached a delicate stage, with many businesses apparently holding off from future investment plans until they can judge how steep the post Brexit “cliff” is likely to be.

Taking a couple more months to weigh up the outlook might well make sense.

But has the Bank boxed itself in? When I first worked in the City 30 years ago, arguably interest rate decisions were rather too obscured in the monetary mists. Indeed, the US Federal Reserve often implemented changes in interest rates without making any public policy announcements – sometimes confusing the markets.

But now we seem to have a running commentary from Bank of England policymakers, including the governor. We even have the so-called “forward guidance”, which has often turned out to be rather poor.

The problem with a running commentary is that it could create market expectations which are difficult to disappoint without losing “credibility”. Yet good central banking often requires an ability to respond nimbly to the latest news, which – particularly at economic turning points – can be volatile and difficult to interpret.

With the economic outlook uncertain, and Hammond’s Budget just weeks away, there is a good case for delaying a rate rise. But has the Bank of England’s desire for “openness and transparency” boxed Carney and his colleagues in?

Perhaps it’s time for a return to the more opaque approach of the past. Perhaps the Bank needs more time, and less talk.

Read more: Bank of England to change tack on rate hike, but it won't be plain sailing

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