So, change is in the air after all! Over the last two months I have become increasingly convinced that it was merely a matter of months before the first rate hike came. The gap between the majority on the MPC and the so-called hawks has been and still is narrow. Martin Weale was already a suspect and now Ian McCafferty has ‘come out’. Momentum is now building to an increase in November or December but, of course, all the Committee the pace thereafter will be gradual.
It has been fascinating to watch Mark Carney coping with a fiercely critical Treasury Committee and a Press that often verges on the downright hostile. He certainly did not have to put up with that as Governor of the Bank of Canada.
He first ran into trouble through seriously underestimating the path of unemployment data, which is tarred with the same brush as a succession of inaccurate Bank of England forecasts. It mattered little that most other forecasters have been similarly confounded.
He has probably found the unreliable boyfriend joke easier to cope with as it has allowed him to demonstrate that he really is reluctant to commit to aggressive tightening. His first task was to kill off the prospect of more QE, which in itself was a big deal. Next and even bigger deal, was to get everyone serious about higher interest rates. He is now close to persuading everyone that whenever the first hike comes the following ones will come gradually and the new ‘normal’ level of 2.5- 3%. This needed to be done because excessive liquidity and abnormally low official interest rates will sooner or later distort investment (business and financial) and the wider economy. The trick will be to start this process without damaging business, investor and consumer confidence. I believe Mr Carney has a good chance of pulling it off.
The crucial public moment was probably the Mansion House speech on June 12th which let the rate hike genie out of the bottle. This apparently reflected the mood of the MPC meeting in the previous week, which was confirmed in the Minutes published on June 18th. From then on it has seemed very likely that the first hike would come in November or December (depending on whether the MPC would want to give notice via the November Quarterly Inflation Report). On this basis it is quite helpful that two members the Committee have started to vote for the first increase now, although Mr Carney will want to avoid any talk of major splits. Nor, in fact, does it matter whether the first increase is delayed until February as at least we shall know it is coming.
It seems most unlikely that the first hike will be delayed until during or after the General Election campaigning. It is really rather shocking that the hare of an Osborne-Carney pact has been set running. Surely holders of such high public office can be relied on to act with propriety? On those who choose to be cynical falls the burden of identifying motives: none in Mr Carney’s case and Mr Osborne could easily present a rate increase in a favourable light (resilient UK economy, helping savers). To confound the conspiracy theorists there is the obvious point that any such pact would be leaked.
Alastair Winter 