Mark Carney, the Governor of the Bank of England, has rejected calls to raise the interest rate, instead saying that it will remain at the current level of 0.25 percent.
Citing the reasons for not raising the interest rate, Mr Carney mentioned “falling” and “anaemic” wage growth, as well as mixed signals about business investment and consumer spending, during his speech.
Wait and see before raising interest rates
Instead, Mark Carney said that he is waiting to see whether weaker household spending is offset by better trade or a rebound in investment and whether wages start to increase before increasing the interest rate.
“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular, anaemic wage growth, now is not yet the time to begin that adjustment [rate rises].”
“In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”
It is an interesting turn of events after the Bank came close to raising rates last week for the first time in nearly a decade, much to the chagrin of borrowers. The Bank of England has a panel that sets out the rates of interest, and three of the panel last week called for an immediate hike to 0.5 percent. They reasoned that this was to stop inflation spiralling out of control after it hit a four-year high of 2.9 percent.
Luckily for borrowers, the other five members of the panel – including Mark Carney – overruled the vote. Following Mr Carney’s comments, the pound fell about 0.4% against the dollar to trade at $1.2682.
Brexit will make us worse off
Mark Carney is a strong believer that Brexit will make Britain’s economy weaker, and as a result, make Britain worse off than otherwise. Just before the Brexit referendum last year, Mr Carney attracted a lot of ire from major Conservative MPs for issuing warnings that a Leave vote in the referendum may cause another recession.
Mr Carney was not one to mince his words when he appeared to speak at his delayed speech in Mansion House on Tuesday morning. The Governor said that “weaker real income growth [is] likely to accompany the transition to new trading arrangements with the EU”.
Mr Carney made the very clear distinction during his speech between the countries in the global economy that have a surplus, and those that have a deficit. He singled out the UK for having a current account that was deeply in the red.
“On the positive side, the deficit is funded in domestic currency and financial reforms have increased the resilience of the UK system, thereby making larger imbalances more sustainable. But the UK’s deficit has also been associated with markedly weak investment and latterly with rapid consumer credit growth. This is not an imbalance that is, as yet, funding its eventual resolution.
“Moreover, despite the large depreciation around the referendum, the extent to which the UK’s deficit has moved closer to sustainability remains an open question, one whose answer depends crucially on the outcome of the Brexit negotiations.
“Most fundamentally, the UK relies on the kindness of strangers at a time when risks to trade, investment, and financial fragmentation have increased.”
This belief was firmly embedded in the Bank’s official forecasts for 2019, which showed a 1.5 percent drop – roughly equal to £30bn.
Many have claimed that Brexit will leave the British economy a lot worse off. These fears were compounded when the current unelected Prime Minister – Theresa May – threatened to walk away from the Brexit negotiations with no deal at all, rather than a bad deal. This sent many businesses into shock, worrying what effect this would have on the economy.
But is Mark Carney wrong?
One of the top Bank of England economists, however, came forward and said that Mark Carney’s verdict could actually be wrong.
Andy Haldane, who is the top economist for the Bank of England, said that Britain could indeed be ready for interest rates to rise. According to Mr Haldane, the reasons for the rates being on hold at their current level of 0.25 percent are beginning to fall apart. He added that Britain’s economy has not decreased as was predicted following the Brexit vote.
Mr Haldane today, said:
“Some of the worst of the post-referendum fears about UK growth have failed to materialise.
“Growth has been more resilient than expected.
“The Bank’s Inflation Report forecasts for UK growth in 2017 have been revised up by over a percentage point since last August.
“Smoothing out the bumps, surveys of activity and confidence, among both consumers and businesses, have scarcely budged.
“Although a little weaker than last year, those surveys continue to point to solid, around-trend, growth.”
It could soon become too late to raise the interest rates, according to Mr Haldane. If he is correct and the Bank of England leaves the interest rates until later in the year, it could mean sharper and more shocking rate rises for the general public later in 2017.
And it seemed that the markets liked what they heard from Haldane. The pound went up against the dollar and the euro after Mr Haldane’s comments.
Fawad Razaqzada, a market analyst at forex.com, said:
“The pound jumped and the FTSE dropped after the Bank of England’s chief economist and Monetary Policy Committee member said he’s ready to vote for an increase in interest rates ‘relatively soon’.
“This came as a major surprise because Mr Haldane has long been a known dove.
“He is going head-to-head against the Governor Mark Carney, who is fast losing support on his dovish stance.”
So is Mr Carney just doom-mongering? Or is he correct to leave the interest rates at their current level? Do you agree with Mr Haldane? Let us know in the comments below, or tweet us @CashLadyUK.