Rob Donaldson

Written by: Rob Donaldson

Rob Donaldson

Partner, Head of Corporate Finance

Unrelenting itch to raise rates will overcome conflicting urge to hold

So this time it's going to happen.  

Definitely.  

According to the majority of economists and the markets, the Bank of England (BoE) will take the next (very gentle) step towards drawing to a close the decade of extraordinary monetary easing and increase interest rates by 0.25 per cent to the giddy heights of three-quarters of 1 per cent.

Or will they? 

The arguments for are that central banks around the world are itching to raise rates in order to give themselves room for manoeuvre. Next Summer the US economy will, on its current path, reach it's longest expansion in modern history. Expansions don't die of old age, there is some other trigger, but the odds on a recession must rise over time and when it comes monetary authorities want to be ready. They want the ability to stimulate and to do that they need to get rates to a level they can cut from. US rates have been rising for some time, the ECB has announced a phased withdrawal of their QE programme and speculation mounts that even Japan is preparing a change of policy. Surely the BoE will follow suit.

Well maybe. Certainly Mark Carney must be a bit irritated by the Unreliable Boyfriend moniker he earned last time a rise was certain (May), only for 90 per cent of economists to be proven incorrect.  He may this time want to ensure that policy is not regarded as unpredictable.  Business have enough uncertainty to deal with.

But...

Whilst the BoE has a single remit to control inflation (unlike the Fed's dual mandate to maximise employment as well), it seeks to do that whilst allowing the most opportunity for growth.  Right now with businesses crying out for some sense of direction from government, with that government riven by policy differences, with our European Partners taking a hard line and the possibility of a hard Brexit rising and with inflation subdued at 2.4 per cent and wage growth slipping a little, there is an argument that maybe the BoE should wait one more quarter for evidence of the slow down at the beginning of the year being a mere blip. 

On balance I suspect the BoE will follow the consensus (that they created with their own signalling) but I think the decision is far more finely balanced than the markets suggest.  Don't be surprised if Mark Carney and his colleagues keep rates on hold for one more quarter.  That's not about being unreliable.  As that famous economist John Maynard Keynes is alleged to have said, 'when the facts change, I change my mind, what do you do sir?'.  The facts are changing all the time...the BoE should be entitled and prepared to change their mind when they do.

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