Bank of England moves closer to raising interest rates
A change of mood is in the air.
There’s a growing consensus that, perhaps very soon, interest rates will need to rise significantly.
The has already, albeit tentatively, started the process.
Now, on our side of the Atlantic, the “should-we-shouldn’t-we” tug of war seems to be moving towards “should”.
Earlier this month, Bank of England Governor Mark Carney said “now is not yet the time” to start raising interest rates.
However, a day after that speech was published last week, the BoE’s chief economist Andy Haldane struck a more hawkish tone.
“Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year,” Haldane told an audience in Bradford.
There’s always a “provided the data are still on track” or other such nod to reading the data tea leaves before taking any action.
But the general conversation among policymakers seems to have moved away from “Absolutely not, not unless…” through “Probably not, unless…” and is heading towards “Yes, unless…”
To be clear, there was a lot more nuance in Haldane’s speech than I can recreate in selected quotes here. That’s always the way with policymakers’ speeches: caveat lector!
In fact, the bulk of it was a rather depressing discussion about weak wage growth – hardly the stuff of rallying cries for higher interest rates.
But he did definitely make a case for tightening. There was a whole section of his speech called “The Case for Tightening”.
Haldane’s not the only BoE policymaker to make such noises.
In another speech given this month, departing Monetary Policy Committee member Kristin Forbes described the fact the central bank policy rates are stuck on the floor as a “failure to launch”.
Forbes listed three reasons why interest rates have been kept so low for so long:
“The crisis has generated headwinds that slow economic growth and make the recovery more fragile; the natural rate of interest is lower today than before the crisis, and economies
have experienced a number of short-term events and surprises that reduced inflationary pressures,” she said.
“But all of these arguments depend at least in part on the assumption that underlying economic growth and inflationary dynamics are too weak to support an increase in interest rates from emergency levels. And a simple look at the economic data suggests that this may not be true.”
Which brings us on to remarks made by Carney yesterday at a European Central Bank policy panel.
Here’s a selected and (by necessity) out-of-context quotation:
“UK output is now in sight of potential, and the capital overhang looks set to be eliminated over the next few years. In order to expand, companies will increasingly need to invest.“A strengthening global economy should tempt UK companies to do so, particularly since UK companies are generally competitive given the recent fall in sterling. Indeed, the broad-based global recovery is creating the possibility of a self-reinforcing revival in investment. The Bank of England estimates that more than 80% of the world economy is now growing above potential.
“Global measures of industrial production and capital goods orders, as well as world trade, have strengthened markedly over the past year, suggesting some rotation in the composition of global demand towards investment. With that more favourable outlook, investment intentions are now rising around the world…
“If these intentions are realised, the global equilibrium interest rate could rise somewhat…”
Clever. Carney has framed the interest rate discussion in terms of business investment.
And he argued elsewhere in yesterday’s remarks that other factors are more important than interest rates in determining business investment. How much money a company’s making, for instance, and how much it expects to make going forward.
In this way, Carney appears to be joining his underlings in preparing the ground for a possible interest rate hike. And he’s doing so without explicitly going back on what he said the week before about now not being the time.
Carney reminds me of my mum’s cat. Bear with me, it’s a brilliant analogy if you happen to know Stanley (which I know you don’t, but that’s not my fault, is it?)
To show you what I mean, the other week my mum went out into the garden and saw he was having one of his regular mewling matches with another cat who’d wandered into his territory.
The two of them got face to face, whisker to whisker, and wailed at each other.
And then… nothing. The other cat refused to budge.
Realising he needed an exit strategy – but not wanting to lose face – Stanley very slowly moved one paw sideways along the ground.
He then moved the other paw in the same direction. Bit by bit, as my mum watched on laughing, he performed a slow motion 180 degree turn.
I think Mark Carney may be doing the same thing. And if I’m right, investors need to start bracing themselves for a Bank of England rate hike.
They won’t whack rates up aggressively. They’ll move very cautiously (unless, you know, data and all that).
But the hints will get heavier. And the market’s already picking up on these hints, judging by the currency action.
The pound touched a five-week high against the dollar this morning, knocking on the door of $1.30.
There’s another angle on all this: Brexit. Since Theresa May lost her majority, the spectre of “Hard Brexit” – whatever you define hard and soft to mean – has receded, at least so far as official discourse goes.
There’s an argument – though BoE policymakers are unlikely to come out and say this – that the interest rate cut last August can be safely reversed if “Soft Brexit” is now the more likely outcome.
Throw in the fact that Britain’s economic performance in the twelve months since the referendum has been more benign than many feared, and you can see why the BoE is groping its way towards nudging rates higher again.
(As a quick aside, economics tends to work with a lag. That is, it’s rare for the impact of an economic shock to show up in economic data immediately, fast-moving variables like exchange rates excepted. So for me, the performance of the last 12 months is neither here nor there vis-à-vis the impact of Brexit. It’s a premature discussion).
Tomorrow, Jim Rickards looks at the interest rate hikes the Federal Reserve has made so far, and why they may already have left it too late.
The Fed is leading the charge on policy “normalisation” (i.e. getting interest rates up to a meaningful level). It’s also the world’s most influential central bank, so its actions have a massive bearing on your portfolio.
So make sure you read tomorrow’s DR.
In the meantime, if you’re worried that higher interest rates will be the pin that pricks the stock market – and you want to prepare for what comes next – then click here