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Bank of England (BoE) Governor, Mark Carney, made overtures towards a November interest rate hike over the weekend and the markets saw that as vindication of the rumours that have been spreading for a couple of months.
Mr Carney suggested that, with consumer price inflation likely to push above the bank’s upper limit of 3.0 per cent in either the September or October data, and with the numbers of workers in jobs at record highs, the Band of England’s tolerance for over-target inflation may be over. It may be appropriate to raise UK interest rates “in the coming months”.
Sterling rose on his comments as traders eyed improved yields and bought into the rumour. The foreign exchange markets have factored in an 87 per cent chance of a November interest rate hike of 25 basis points. The question is, though, is the Bank at risk of acting too soon?
It is true that employment is at a record high, but that hasn’t yet pushed wage price inflation above the consumer price inflation; so disposable incomes are lagging high street prices. What is less clear is what will happen to UK employment levels when the UK does leave the EU and starts managing its borders in a more coordinated away.
In 2016, The Office for National Statistics says 11 per cent (approximately 3.4m) of the UK labour market were non-UK nationals. Will they stay or be allowed to stay after Brexit and what would any change do to the productivity, employment and vacancies levels? No one can know that right now. So whether the high (almost full) employment will, in time, cause further wage price growth is unclear but it isn’t a factor yet.
The Bank of England generally states that they look 18 to 24 months ahead when factoring in the impact of interest rate changes. That takes their forecast period beyond the final date for Brexit negotiations and into the time when the UK should no longer be a member of the EU. You could certainly argue that caution should be applied over what the UK economy will be able to tolerate at that point. Of course, the BoE may be thinking of attracting inbound investment with higher yields over the transition period.
The BoE also looks closely at the housing market when making interest rate decisions. The UK is more heavily weighted towards domestic property ownership than many EU states. UK house prices are still rising. The 1.1 per cent rise in the month to 7 October roughly corrected the unexpected 1.2 per cent drop in the previous month, according to Rightmove. However, the top end London properties are finding less demand than mid-range Northern properties.
The Royal Institute of Chartered Surveyors (RICS) reported that 15 per cent more respondents to their survey reported a drop in completed sales than a rise. The irony for the BoE is that hints of higher interest rates will tend to depress the appetites of property buyers anyway; so do they even need to raise rates, or just hint at doing so if they want to temper property market exuberance?
And, if the BoE has an eye on the impact higher interest rates will have on businesses, they need look no further than last week’s BDO survey showing manufacturing output falling and the equivalent service sector survey showing barely-visible growth. The last thing any of these companies needs is higher borrowing costs.
So, whilst it is laudable that the Bank of England wants to return interest rates to some semblance of normality at some stage, the uncertainty in the UK economy and the known factor of several more years of uncertainty may make Mark Carney pause for thought before pressing the ‘hike’ button.