The Bank of England’s “dartitis”
“I do like low interest rates.”
“I think low interest rates are good.”
“I’d like to see rates stay low.”
“She’s always been – you know, she’s historically been a low interest rate person, a believer.”
Donald Trump there, when asked about Federal Reserve Chair Janet Yellen in a leaked transcript from a recent interview.
Now in principle the Fed is independent when it comes to setting rates. But if Yellen wants to Trump to reappoint her next year…
Well, he’s made his position clear on what he wants to see happen to rates. Keep ‘em low.
I’ll get back to the Fed in a moment.
Before that, there’s the obvious matter of today’s Bank of England “Super Thursday” (ugh!) to digest…
First, the bare-bone facts of the interest rate decision:
- They didn’t change it – Bank Rate is still at 0.25%
- The Monetary Policy Committee vote was split 6-2. Saunders and McCafferty once again voted for a hike; Haldane, despite recently flirting with the idea, voted to hold
So the post-referendum cut remains in place.
But that’s not all that happened today. What made it a “super” Thursday is the release of the Inflation Report.
“GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption,” the report says in its opening paragraph.
And to be honest, we can stop reading right there.
The quarterly Inflation Report is a chance for the BoE to stroke its collective chin, suck on its pipe and tell us all what it thinks inflation and economic growth will do in the months ahead.
In other words, it’s full of forecasts. And forecasting is notoriously difficult.
The BoE knows this. That’s why it produces its famous fan charts. These show not only the central forecast, but give an idea of what the distribution of expected outcomes looks like (a density forecast, to use the jargon).
Here’s the latest inflation fan chart:
You can see that the BoE expects inflation to fall back towards its 2% target over the next few years.
But it might double…
Or we could conceivably see it dip back below zero…
It all depends.
As for growth, the BoE expects it to pootle along between 1% and 2.5%.
But growth could turn out to be much stronger than that, it tells us, or we might have a recession:
Again, it depends. If inflation picks up, if growth remains decent, the MPC will feel bolder.
If not – well, how does another decade of zero interest rates grab you? (By the way, if you’re fed up with it and want to find novel ways to get your money working for you again, click here)
It’s not exactly clear what the MPC is waiting for.
Unemployment is at four-decade lows, at least according to official figures (and they’re the figures that drive official decisions).
Inflation’s above target…
Maybe it’s the recent slowdown in growth? Or the uncertainty about Brexit?
Whatever it is, there’s a real sense of “if not now, when?” about this. And the policymakers are feeling it.
I wrote a few weeks back that the BoE is moving closer towards raising interest rates.
I stick by that. Prominent MPC members have been making the intellectual case for a hike.
They’re laying the groundwork. The tricky part is choosing the moment to pull the trigger.
It brings to mind that time Eric Bristow had “dartitis”.
“I brought my dart back, got halfway through throwing it and could not let go,” is how the Crafty Cockney once described it to an interviewer.
“I don’t know how I got it, or how I got rid of it, but I had it for about 10 years.”
Those six MPC members who voted for no change today clearly feel it’s too soon for a hike.
But if not now, when?
We were supposed to well into the period of “normalisation” by now.
It started – later than originally trailed – in December 2015 with the Fed.
Since then the Fed has hiked three more times. And now, as you read above, it’s under pressure to stop, with the fed funds rate in the lofty range of 1-1.25%.
Yellen and co may well choose to ignore Trump’s wishes. But, as Jim Rickards has written to you before, they may find other reasons to call a halt:
- If there’s a stock market sell-off
- If US job creation dries up
- If the US inflation rate continues to fall
And if the Fed does pause, there’ll be less pressure on the Bank of England to finally let go of its dart.
Rather than wait for a “normalisation” of interest rates, you’d be better advised to take matters into your own hands.