Why is governor signalling early rate rise?

 
The Bank of England

When the governor of the Bank of England told the City at the Lord Mayor's Banquet tonight that an interest rate rise could happen "sooner than markets currently expect", he might equally have said, "sooner than I expected".

The point is that markets reflect signals on the timing of a rate rise emitted by Mark Carney and his colleagues on the Bank's Monetary Policy Committee.

And those signals have, till tonight, been pointing towards an interest rate rise in the first half of next year.

But as of Thursday evening, a small rise in the Bank rate of 0.5% (so close to zero as makes little difference) - a likely increment of 0.25% - seems probable some time this year.

Strong momentum

As I've said before, there would be huge political advantages to moving early, perhaps in the autumn, because the Bank would not be vulnerable to accusations that it was in some sense influencing the outcome of next May's general election - which would be an issue if it raised rates either just after or just before the election.

But although this governor has conspicuously sensitive political antennae, his avowed reason for saying that the "start of the journey" to increase the cost of money "is coming nearer" is that the momentum in the British economy shows no sign of slowing.

Growth is strong and employment creation is strong - which means that the spare capacity in the economy, which the Bank estimates at 1% to 1.5% of GDP, may be used up sooner than the Bank had been anticipating.

And that would in turn mean that inflation might start to accelerate, because companies would have to pay more to hire people, and would have to pass on those higher costs in the form of rising prices.

That would necessitate interest rate rises to slow the economy and suppress the inflation.

That said, the Bank had been taking the view that towards the end of the year, growth would slow and productivity would rise.

That would dampen inflationary pressures even without an interest rate increase - when productivity or output per worker improves, companies can pay their people more, without feeling under pressure to increase the selling price of their goods and services.

But as Mark Carney concedes, what we can observe right now is a buoyant economy - and the automatic corrective action, of a slowdown and improved productivity, is hypothetical.

So he says that the Bank may feel obliged to take out insurance against the economy overheating by imposing the dampening influence of a small interest-rate rise.

Change of view

But there is something slightly curious about this change of tune by the governor, in that the economy is performing broadly in line with the Bank's forecasts.

A cynic might, therefore, observe that if Mr Carney is saying that interest rates should rise sooner rather than later, what has probably changed is the balance of opinion on the MPC, rather than the economic fundamentals.

Mr Carney may be positioning himself at the vanguard of a hawkish consensus to raise rates early, having hitherto been more of a dove, perhaps because he doesn't wish to be seen to be a defeated dove.

Even so, in other respects he is sticking to his old tune, by insisting that rate rises will be small and gradual.

And although he says markets may be wrong that the first interest rate increase is some time away, he implies markets are right to believe that the policy rate will rise to only 2.25% over the next three years - because it is on that path for interest rates that the Bank believes the economy will become more balanced and the output gap will almost be closed.

In other words, for those of you with big debts who have been made anxious that the era of free money is drawing to a close, there is some comfort to be had that there should be no return to penally priced money for many years.

Due to technical problems this blog had to be published twice. Some reader comments are on the earlier publication below.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

This column...

This column may be a bit quiet for a bit, because I am away from the office.

Read full article

More on This Story

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    0

    Comment number 69.

    I advise everyone who even has even just a balcony flat to learn how to grow their own veg. Just over the horizon is energy and commodity and food shortages or at least severve competion for those resources. We need visionaries to lead us and all we have are plonkers pushing out the same old drivel. Dont they yet realsie very few beeive any of them (or BBC) any more

  • rate this
    +2

    Comment number 68.

    65.mart1000
    Sounds good. Perhaps also build some houses? Say 250,000 units per year (which we're told are necessary to keep up with population) and at a price the average person can afford (say £100K based on 3.5 times the average private sector full time salary. It's do-able, but remember the 'haves' will do anything they can to ensure the 'have-nots' remain stuck at home or in rip-off rentals.

  • rate this
    +2

    Comment number 67.

    And in the other piece on the BBC today

    "Mortgage lenders have said that a cap on the size of mortgage loans is unlikely to be "the first tool in the box" to cool the housing market."

    The banks, the BoE & the Gov know the truth, the banks are bankrupt. If house prices fall, their assets fall with them, so even after the bailouts we are still being mugged every day to keep them afloat.

  • rate this
    +1

    Comment number 66.

    A housing bubble is a problem of the Tory / LibDem government's own making! They have promoted house price inflation to create the illusion of economic growth with hare brained schemes such as Help to 'Sell' dutifully followed by equally daft and unsustainable 'affordable' housing schemes across the UK. Predictably it is the most vulnerable and naïve who will suffer in the long deep correction.

  • rate this
    +2

    Comment number 65.

    3x BASIC salary FULL STOP. Exclude bonuses
    Tax BTL and foreign buyers out of existance
    Clamp down on empty property, derilict land, land banks and estate agents and then the market may just work instead of being loaded

  • rate this
    +3

    Comment number 64.

    sheep will probably be a very useful asset/commodity in the near future, much better than useless fiat toilet paper...

    so i hope she finds them before the next inevitable crisis...

    total worldwide govenment debt stands at approximately $100trillion, does that sound like a 'recovery' to you folks? it has increased by $30tn in the last 7 years alone.

    It will not end well....

  • rate this
    +2

    Comment number 63.

    Forward Guidence means that by talking about raising interest rates, this hopefully will cool off the market, but really they have no intention in doing so, because they cant.....

  • rate this
    +7

    Comment number 62.

    Mortgages need to be limited to 3x Annual Salary of the main bread winner.

    Tories promote family values, parents taking time to bring up their kids responsibly. But with both having to work, to pay inflated mortgages and rising child care costs, children have a worse upbringing, divorce rates are up & society suffers. As does the economy as disposable income is sucked into the banks.

  • rate this
    -1

    Comment number 61.

    60. You failed to mention that little bo peep has lost her sheep.

  • rate this
    +3

    Comment number 60.

    no point rasing rates, we are at ZIRP forever. Carney knows he cant really raise rates.

    There is no recovery, it is a fiddled lie, we now include prostitution and drug use in our GDP!!!!

    World trade is tanking, Europe is toast (trying to force over leveraged banks to lend more!) and the US is entering the greatest depression in history, our debt is growing and exports are falling not rising!

  • rate this
    +2

    Comment number 59.

    Build houses so that solves the problem does it? That assumes we stop foreign buyers buying cash and leaving empty . We absolutely MUST stop using housing as a investment /ponzzi scheme once and for all , otherwise its bye bye UK. If we have another recesion very shortly I see civil unrest

  • rate this
    +3

    Comment number 58.

    People talking about building houses don't get it. To make a real difference to house prices you would have to build millions in all regions of the UK, its not feasible and unless they were state owned (council houses) the builders would just keep prices up with bank lending. The only way to bring them down is control over interest rates and overall mortgage lending as it used to be 40 years ago.

  • rate this
    +1

    Comment number 57.

    That'll be the austerity measures then.

  • rate this
    +1

    Comment number 56.

    Maybe someone from the treasury whispered in Georges ear,

    “Wasn’t it high loan to value mortgages”

    and…

    “Small deposits, that didn’t allow for HP falls”

    and…

    “95% loans”

    “That caused the 2008 crises”

    “It was called trailer-trash loans in America”

    “We’ve called it HTB and F4L”

    “WHOOPS”

  • rate this
    +1

    Comment number 55.

    @17 siz1000
    I do not think we old people are complaning that the rates are low, in my opinion it is the fact that borrowing rates are so much higher than the lending rates. banks seem to be winners all round.

  • rate this
    +2

    Comment number 54.

    Any increase in rates will be damaging to all borrowers. The banks will immediately pass on the full increase to any borrowers. However, savers will not get the full increase because they never do.
    Banks lend money at a standard mortgage rate of around 4%. This is the cheapest rate of borrowing, loans,overdrafts and credit cards are much higher. The banks can afford to pay more to savers, but..

  • rate this
    +3

    Comment number 53.

    It's not just pensioners with savings. Some of us younguns believe in it too. We've had low interest, inflation on food etc., rent increasing by 6% or more! at the whim of The Lord. All to save a decent, not minimum, deposit for a house. couldn't care less & want you to be leveraged to the hilt rather than go in with a 35% + buffer on a average house. Now they let house prices go bonkers too!

  • rate this
    -1

    Comment number 52.

    Why is governor signalling early rate rise?

    Because he's a gambler and obsessive loser. All his gambles so far have failed - look at his forward guidance mess. Look at his "I'll handle the house price bubble!"

    I'm sure Las Vegas would love it if we shipped Osborne and Carney out there.

  • rate this
    +3

    Comment number 51.

    the economy is going downhill fast because of disinvestment due to negative real interest rates. Those who have money have taken it elsewhere. There is a limit to which Carney and co and squeeze wages to pay for holding up asset prices.No such thing as a free lunch. I fear they have done so much damage with their moronic low interest rates policy that the market won't get you ab cheap one either

  • rate this
    +4

    Comment number 50.

    32. David

    ''Stop talking bubble and resolve the underlying problem, an island with too few houses...''

    ...or too many people?

 

Page 3 of 6

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.