- The Bank of England has announced a hike in interest rates for the first time in a decade
- The base rate will rise from 0.25% to 0.5%
- With the economy fragile, is Carney making a mistake?
It would be more fun if they were going up because everyone felt marvellously confident in the economy. But they don’t. Yes, inflation is at 3%, but not because the economy is surging ahead, but more because of a reflection of the weakening currency in the wake of Brexit. Consumer borrowing is rising, but this too appears to be a problem of declining wages, rather than a sign of reckless spending. Wage growth would normally be a sign that rates should rise, but it continues to lag inflation.
Plenty believe Carney is making a mistake. He admits that an interest rate rise is unlikely to have a significant impact on consumer credit, because the spread is so high on most consumer credit products. The effect will be marginal - taken by borrowers on variable rate mortgages, which will hit households’ propensity to take on new debt in the meantime.
Much depends on whether you believe that the economic effects of Brexit are not as bad as we think, or have just been delayed. Certainly, the economy has not been as weak as the BoE predicted in August 2016, but that is not necessarily a sign that Brexit is going swimmingly. It may just be that companies have hedged their bets for longer than expected. Equally, the impact of inflation has only just started to bite on consumers, with retail sales in September weaker than expected It also depends on whether you believe that the relationship between unemployment and wage growth has broken down permanently, or temporarily. Unemployment is still low by historic standards. Normally that would push up wages, as workers could demand salary increases, but this hasn’t happened. Again, this may be just around the corner, waiting to push up inflation. Or it may not.
The UK 10 year bond yield dropped in the wake of the announcement, as did sterling. Both had risen on speculation of an interest rate rise, and fell back on cautious comments by Mark Carney and other members of the MPC on the path of future rate rises. There were still two members of the committee who voted to leave interest rates at 0.25%.
In the end, this rise is perhaps more symbolic than transformative. It is unlikely to be a nail in the coffin for consumers or businesses. And perhaps it means that the Bank of England believes things are not quite as bad as all that.