Pound plunges after Bank of England's dovish rates signal

Will the Bank of England raise interest rates?

17 March

Sterling jumped against the dollar yesterday and was trading close to $1.24 this morning after the Bank of England sounded a hawkish note on interest rates.

According to the latest report, only one of the nine members of the monetary policy committee (MPC) voted to increase rates at its March meeting.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

The news came as a surprise - not one of the economists questioned in a Reuters poll had dissented from the consensus view that all the rate-setters would vote for the status quo.

To boot, the minutes also revealed that several other MPC members had said it would not take much for them to follow suit in voting for an increase soon.

"Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted," it said.

Investor bets on rates going up as soon as early 2018, from a prevailing view of no earlier than 2019, have risen to around 50 per cent, Reuters adds.

But Larry Elliott in The Guardian argues a rates hike will not come as soon as this analysis of the minutes might suggest.

First, he says, noted rates hawk Kristen Forbes is leaving the committee in June, making it harder to get to the five needed to force a change in policy.

Added to that, Bank of England officials take up five of the nine places on the committee and tend to vote with governor Mark Carney, who has repeatedly sounded a cautious note on the UK economy's progress ahead of Brexit.

Finally, Elliott says, while inflation is set to rise as a result of the falling pound, it is not being accompanied by wage rises and so there is little danger of an inflationary spiral that will necessitate central bank intervention.

He concludes: "With wage growth nugatory and Brexit talks about to begin, the City's much-anticipated rate rise is still a way off. It certainly won't happen this year."

US interest rates 'could increase next month'

16 February

Interest rates in the US could increase "as soon as next month", says the Wall Street Journal.

The claim comes on the back of official figures yesterday showing consumer price inflation in the US has risen "to its highest annual level in nearly five years", of 2.5 per cent.

At the same time, the government said retail spending had increased at a faster-than-expected rate in January, while factory output also picked up pace.

Together, the indicators point to "a healthy start for the year for the US economy" and suggest "years of sluggish price growth could be coming to an end".

That, in turn, could prompt policymakers into action - and Fed chairwoman Janet Yellen said earlier this week it would be "unwise" for the central bank to wait too long before moving to tighten borrowing again.

So far, investors remain ultimately unconvinced by the hawkish tone, with the dollar and stock markets rising but direct bets on federal funds rates still implying only two rates hikes this year.

That's one less than the Fed forecast when it raised rates in December and which yesterday's figures might make more likely to be deliver.

Officials are certainly making the right noises to vote for rate hikes soon.

Patrick Harker, Philadelphia Reserve bank president and a voter on the Fed's rate-setting committee, told Reuters he sees "three hikes as appropriate for 2017, assuming things stay on track".

Influential central banker, Boston reserve bank president Eric Rosengren, who doesn't have a vote on policy this year, told Reuters there should be "at least" three increases.

Treasury committee to investigate ultra-low interest rates

22 December

MPs on the influential Treasury select committee are to scrutinise the ultra-loose monetary policy that has prevailed since the financial crisis.

Tory politician Andrew Tyrie, who chairs the committee, said he wants to investigate the "unintended consequences" of maintaining the Bank of England's base interest rate at a record low.

After reducing the rate to 0.5 per cent in March 2009, the bank has resisted pressure to increase it – and even cut it to 0.25 after the Brexit vote this year.

Tyrie's panel will also review bond purchases of £435bn made by the bank over the same period as part of a "quantitative easing" programme that has now extended to private company debt.

Critics argue the net effect of all this is to drive down rates of return on cash, forcing companies and people to set aside more money and opening up substantial pension deficits.

In addition, some argue that by encouraging money to be invested in growth assets such as stocks and property, the policies have inflated asset bubbles and boosted inequality.

Bank of England governor Mark Carney has repeatedly argued that without these measures, the economic crash would have been worse, leaving more people out of work and struggling on lower wages.

He has also responded to criticisms levelled by politicians including Prime Minister Theresa May by arguing the government could invest in the economy to correct distributional effects.

Tyrie insisted his committee's investigation was not intended to presage a return of the bank to government control and said instead the review will look at ways to "protect" its independence.

The panel could still recommend a change in the inflation-controlling remit given to the bank by the government, which might alter policy conclusions, or it could even criticise government fiscal policy.

"The theory behind austerity was that monetary stimulus would generate the growth and the tax revenues to enable the government to fix the hole in the public finances," says Larry Elliott in the Guardian.

"The conclusion the select committee should reach is that this unbalanced approach didn’t work last time and it won’t work next time either."

Interst rates: Economists doubt Federal forecast for three hikes

19 December

Markets were caught off guard last week when US central bank the Federal Reserve announced its first interest rate rise of the year – and only the second in the past decade.

The increase itself was not a shock: it was the "dot plot" publishing alongside the decision, which revealed that Fed policy-makers are pricing in three interest rate rises in the coming 12 months.

That's consistent with a more bullish economic mood, as well as simmering speculation that a promised package of infrastructure investment from president-elect Donald Trump will fuel a surge in growth and inflation.

But this was not "priced in" to markets. In the wake of the announcement the dollar jumped to a 14-year high, gold shed $20 an ounce and short-term government bond yields hit a seven-year high.

The dollar rises when interest rates are rising – and gold is negatively correlated to the dollar. Bond yields move inverse to prices, suggesting demand is falling for fixed-income assets whose relative value is diminished in periods of higher rates and inflation.

A febrile mood on the markets is likely to persist for months as investors wait to see the reality of Trump's promised economic package.

Economists, however, are not convinced by the Fed's narrative of stronger growth and increasing interest rates.

A survey of 31 Wall Street experts by the Financial Times found an average expectation for the Fed's short-term interest rate to be between one and 1.25 per cent by the end of next year.

Following this December's hike, the rate is between 0.5 and 0.75 per cent, implying economists expect just two quarter-point rises in the coming 12 months, instead of the three the Fed is forecasting.

Maybe the experts were worried after this year's relative inaction on rates, the FT speculates. In December last year the Fed tightened borrowing costs for the first time since the financial crisis – and predicted it would do so four times in 2016.

In the event it held rates all year before finally raising just once last week.

The experts are also sceptical about Trump's effect on the economy, predicting that the US economy "will grow an additional 0.2 percentage points in 2017… putting overall expansion at 2.2 per cent".

Interest rates held as Bank of England wanrs of wage squeeze

16 December

UK interest rates have been left unchanged after this year's final meeting of the Bank of England's monetary policy committee.

The unanimous vote for no change had been widely expected, along with the committee's commentary pointing to economic uncertainty and so potentially frozen rates for many months ahead.

"Monetary policy could respond, in either direction, to changes to the economic outlook as they [unfold] to ensure a sustainable return of inflation to the two per cent target," the minutes of the meeting said.

Essentially, says The Guardian, the bank will "continue to trade off the effects of a weaker pound raising inflation against the prospects of economic growth and employment slowing".

The first part of that equation could be bad news for UK workers. Indeed, the minutes also "repeated a warning that higher inflation and slower wage growth risk squeezing household budgets and spending next year".

Sterling has fallen more than 15 per cent against the dollar since the vote for Brexit in June. This is adding to import prices, which economists say could push inflation to three per cent next year.

Wage rises are currently running at around 2.5 per cent, so it is probable that at some point real wage growth – pay increase minus the depreciating effect of price rises – will turn negative.

The bank's policymakers acknowledged this was likely, but hint they will hold off from increasing interest rates for fear of hurting the economy while it is already dealing with Brexit uncertainty.

"However, the bank said it could be pushed to raise interest rates if… high inflation started to be built into wage settlements, which would run the risk that high inflation becomes entrenched," says the Financial Times.

Ian Shepherdson, the chief economist at Pantheon Macroeconomics, told the Guardian the bank had reflected "great uncertainty ahead" and that it will to continue to hold borrowing costs "for many months to come".