Why the Bank of England would be wrong to raise interest rates this year
At a time when central banks all around the world are stimulating their economies through monetary and/or quantitative easing it's madness that the Bank of England is considering raising interest rates – and if anything the next move should probably be a cut to 0.25 per cent.
The Bank of Canada cut rates last week citing a sluggish recovery in non-energy exports. Due to the threat from a strong Krona, the Swedish Riksbank took its key interest rate even further into negative territory, to -0.35 percent. The US Federal Reserve did not raise rates at its June meeting, in part because of the strength of the dollar and hence lower profits of major exporters such as Microsoft and Caterpillar. Retail sales in the US fell 0.3 per cent last month lowering the prospect of a rate rise in 2015.
Then Mark Carney appeared once again claiming that the monetary policy committee was ready to pull the trigger on rate rises in the UK.
Carney has made a career out of confusing markets by saying one thing one week and then something else the next time he opens his mouth. It's not the first time he's made such claims – in June last year he warned interest rates could rise sooner than market expectations. At the time, it was thought rates would stay at 0.5 per cent for until the beginning of next year and possibly longer.
His latest intervention was likely a response to a recent comments from the Bank of England's Chief Economist Andy Haldane, who said he was against tightening too soon. As often happens there is apparently an internal fight going on at the MPC between the hawks and the doves, but in any case Carney only has one vote out of nine.
It beats me why would you want to be tightening while every other central bank in the world is loosening?
Carney's careless talk strengthened the pound which is the opposite of what is required, as fiscal policy has once again been tightened. Since April the pound is up about five per cent against the dollar and up 13 per cent against both the Krona and the euro since the beginning of this year.
Manufacturing output decreased by 0.6 per cent in May 2015, compared to April 2015 and is still 10 per cent below its pre-recession levels. Exports in May 2015 are below what they were in May 2013.
The economic growth we've had so far in the UK, in my view, is largely propped up by the monetary stimulus. Raising rates would hurt those on variable rate mortgages just as the unemployment rate has started to rise again.
The concern is that raising rates too soon means the next move ends up being a cut. Personally it looks like the next move should probably be a cut to 0.25 per cent. It all depends on the data.
Dr Carney.David Blanchflower is professor of Economics at Dartmouth and Stirling an ex-member of the MPC from 2006-2009.