AAccording to Rishi Sunak’s budget, it rests with the Bank of England. On Thursday of this week, Threadneedle Street will put an end to frenzied speculation of will over whether we will see the first rate hike since Covid-19 began.
Financial markets are betting that this is the moment to lift off the current all-time low of 0.1% against a backdrop of soaring inflation and an economy just a hair’s breadth from its pre-pandemic peak.
Britain’s largest banks clearly agree and are pushing mortgage rates up in anticipation.
Households are being warned of a threefold blow: The pressure on the cost of living from high inflation will be heightened by the Chancellor’s increase in taxes and the central bank’s increase in borrowing costs.
However, be careful tossing in your chips if City speculators are betting on a spike this week. While it is clear that the cost of borrowing is only that high, timing is by no means guaranteed.
The bank’s Monetary Policy Committee (MPC), which sets interest rates, is charged with bringing inflation back down from just under 5% to the 2% target next year, and has many reasons to wait and see.
Global supply chain disruptions are the main driver behind the recent inflationary outbreak in the UK, but the bottlenecks are expected to resolve over the next year. In the meantime, the interest rate adjustments will no longer produce truck drivers.
Empty shelves in supermarkets are the result of supply chain problems – which are also driving inflation higher. Photo: Getty Images
Economic growth has stalled amid the disruption in recent months, while consumer confidence has fallen and coronavirus infections have remained stubbornly high. With a difficult winter yet to come, hike rates to take some heat from the already cooling economy could prove short-sighted.
Instead, some MPC members urge caution, believing it will take more time to gauge the impact of the September end of vacation and see if bottleneck-driven inflation spills over into further wage increases for UK workers.
If one can orientate oneself on official budget forecasts, an inflationary spiral leading to higher wages is unlikely in the foreseeable future.
According to the Institute for Fiscal Studies, a decade of stagnant wage growth is turning into two – the worst time for rising living standards in modern British history. It’s hardly a suitable backdrop for the first rate hike since the pandemic began.
For these reasons, the interest rate decision on Thursday is likely to be a finely balanced affair. With some MPC members preferring to wait, the vote on the nine-member rate-setting panel will likely be split. The start could be delayed until December. Or later. Andrew Sentance, a member of the MPC from 2006 to 2011, believes February would be a more appropriate time.
Scrooge-like rate hikes before Christmas are rare, with only one December hike since the mid-1970s. Such a move would be outside the normal cycle of the bank’s monetary policy reports and press conferences detailing its actions. A break with this pattern could signal that the bank has fallen behind the curve.
Andrew Bailey, his governor, played his cards close to his chest. The city’s economists take his apparent reluctance to talk down the financial markets as a tacit admission that interest rates are now set to rise.
BNP Paribas economists call it the “sound of silence” by Bailey, but it is a delicate position as financial markets are effectively cornering the governor. A rate hike on Thursday would fit the picture, but a respite could embarrass the governor.
For the successor of the “unreliable friend” Mark Carney, who disappointed the city tale in 2014, history could repeat itself.