The Bank’s call on interest this week is the toughest in months. Evening Standard writers Simon English and Russell Lynch slug it out on what Mark Carney’s team must do…
Simon English: Rates should rise
There are at least five good reasons why the Bank of England should raise interest rates tomorrow. And one flippant one (my favourite). The jokey reason for the monetary policy committee to put up rates (it’s not known for a sense of humour) is to make economists, including Russell Lynch, look even sillier than usual.
Ever since the latest GDP figures came in at 0.1% for the three months to March, City scribblers have been telling clients that a May rate rise was now off the table. According to the experts, it was a nailed-on certainty just before then, so we’d generally be better off asking Mystic Meg what she thinks.
Economists blame Bank Governor Mark Carney’s flip-flopping for their ever changing moods (their rule seems to be this: we can change our mind, Carney isn’t allowed to change his).
1. The best reason to start moving rates up is simply that it’s (well past) time to start normalising monetary policy. Rates were only supposed to be this low to get us through the banking crisis, which was eight years ago and is very definitely over. We’ve got an emergency interest rate long after the emergency has passed.
Having rates at 0.5% is distorting in all sorts of ways, not least because at this point it actually hinders financial stability rather than aids it. If money is cheap, all sorts of people who shouldn’t or don’t need to borrow overstretch themselves.
Arguably, there’s a bubble in stock markets, corporate debt, car debt, real estate and cryptocurrencies. That’s all cheap money looking for a home. If those markets all go pop at the same time, we really will be in trouble.
2. At 2.5%, inflation is already above the Bank’s target — something it has ignored, seemingly out of fear of what a rate rise would do. It’s trending downwards, we’re told, but for pay rises really to help the economy, it needs to fall faster. At 0.75%, rates would still be extremely low. But that small rise might nudge inflation down in helpful ways.
Leaving rates low hurts the pound, which in turn fuels inflation.
3. Productivity, or lack of it, has long been deemed a problem. And Zombie companies are at least partly to blame. Firms able to just about survive, just about service their debts, linger on, doing no one any good in the long run. They will continue to drag the economy down for as long as rates stay this low.
4. House prices have wobbled lately but the proportion of the nation’s wealth that goes into housing remains absurd. Because enough people are willing to borrow four times their salary at a low rate of interest in order to buy a house, that means everyone else has to follow suit. A gradual rise in rates would help stem this national madness, in the end easing prices and making life more affordable for almost everyone.
5. There are far more savers than there are borrowers. For a good while, it made sense that monetary policy was skewed in favour of the young and middle-aged workers trying to bring up families. It is long overdue that savers got some sort of break, some sort of reward for their prudence.
The Bank of England seems all-but certain to hold rates tomorrow. The truth is it should have started putting them up ages ago.
Russell Lynch: Hold fire
This year hasn’t been a great one for the Bank of England’s crystal-ball gazers, but compounding their errors tomorrow through sheer bloodymindedness — as Simon English recommends — will only make things worse.
Admittedly, Governor Mark Carney and his monetary policy committee colleagues have led the City a merry dance since February. They said then that interest rates might rise “earlier and by a somewhat greater extent” than everyone thought. Rate-setter Gertjan Vlieghe was even more explicit, saying “one or two rises” a year could do the job of bringing inflation back to target. May-day looked nailed on.
But that was then. The Bank’s caveat — which never makes it into the headlines — is that its policy steers hinge on the UK’s fortunes evolving as expected in its latest forecasts. Quite clearly, they haven’t. Piling the recent data on to the economic scales certainly doesn’t tip you in favour of immediate action.
Take inflation, the main handbrake on the UK economy last year. At 2.5%. it’s still above the Bank’s 2% goal but it’s falling far more sharply than the MPC reckoned just three months ago; far from still being above the target at the end of the year, it could be below 2% by the end of the summer. Inflation hawks urging the Bank to move immediately have no succour here.
Then there’s the economy’s lame-duck growth in the first quarter of the year. How do you sell a rate hike to the man and woman on the Clapham omnibus when the UK is barely above stall speed? Again, that insipid 0.1% advance is a third of the pace pencilled in by the Bank, and ample reason to hold fire.
Hawks can come out with all the usual lines about how official figures get revised up (etc, etc) but I’d be more convinced if that scary number had come out of a clear blue sky.
In fact, the signs leading up that point on retail sales, house prices, industry activity and consumer spending had been distinctly gloomy. The Office for National Statistics went out of its way to play down the impact of snow and flag up the slowing trends within our services firms. Record low unemployment — another main crux of the hikers — has yet to show decisively that it is feeding through to wage growth.
Meanwhile, the wider economic climate is cloudier. The UK stood on the shoulders of a buoyant eurozone economy last year to eke out what little growth it did see, but that Continental momentum is flagging.
Speaking of Europe, UK firms will be despairing again at the Conservative infighting over Brexit trading relations this week before we’ve even sat across the table from negotiator Michel Barnier. The optimism of last December’s mini-breakthrough has dissipated, Theresa May’s political high noon approaches, and companies have yet more reason not to spend money.
So what on earth has changed to push an MPC majority in favour of a rate rise now, when they stood pat six weeks ago? The recent soft patch means it has the luxury of waiting another three months before acting if necessary.
As for the volte-face, so what? As John Maynard Keynes said. “When the facts change, I change my mind. What do you do sir?”