We’ve Heard it All Before

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Duncan Farmer considers which way the Bank of England will go with interest rates. Mark Carney’s strong hint to John Humphrys that interest rates could rise this month (November) sent headline writers scurrying for their pens and analysts predicting what this would mean for the property market, which is already facing something of a downturn.

The trouble is that not only has Mr Carney, the Governor of the Bank of England, said all this before, but from an economic point of view putting up the base rate now does not appear to make sense.

Looking back to June 2014, Mr Carney said that a rate rise “could happen sooner than markets currently expect”; in July 2015 he said that he expected rates to rise over the next three years, reaching “about half as high as historical averages”, or about 2 per cent; three months later he appeared to repeat that belief.

However, three months after that he changed his mind: “Since last summer, progress has been insufficient” to warrant higher interest rates, Mr Carney said, adding that “the world is weaker and UK growth has slowed”. In August last year his Monetary Policy Committee did an even bigger U-turn and rates were cut from 0.5 per cent to 0.25 per cent and members signalled that they would be reduced further in coming months as the economic fallout from the Brexit vote to leave the EU became clearer.

One thing is for certain, the fallout from the Brexit vote is anything but clearer now, but what should also concern Mr Carney and his colleagues on the committee is that the UK economy is still in the doldrums. At the end of September this year the BBC reported that the UK’s economy grew at its slowest annual pace since 2013 in the three months to June, according to revised official figures. Gross domestic product grew by 1.5 per cent from a year earlier, the Office for National Statistics said, down from an earlier estimate of 1.7 per cent.

The quarterly growth rate remained unchanged at 0.3 per cent, but crucially “the figures sent the pound lower, as they appeared to cast doubt on whether the Bank of England would increase interest rates later this year”. On the very same day Mr Carney appeared on the Today programme and made his strong hint.
It is anyone’s guess whether rates will rise this month, but mine is that they won’t.

 

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