Economist Questions Carney’s Rate Hike Comments

With inflation falling, wage increases still nugatory, and demand worse than expected in the UK’s two biggest export markets – the eurozone and US – why oh why did the governor of the Bank of England signal last week that interest rates could start to rise this year?

Today’s minutes of the Bank of England’s Monetary Policy Committee meeting of 4 and 5 June shed a bit of light on this.

And the main argument appears to be this:

1) that the economy is gradually returning to normal;

2) so we should all prepare ourselves for a world in which the Bank’s “policy” interest rate is no longer almost zero;

3) that it is probably better for the interest rate rises to be tiny, certainly no more than 1/4% and perhaps as little as 1/8%;

4) and that if rate rises are going to be so small, it is better to get on with them sooner rather than later, to evaluate what kind of drag they might impose on growth (since the impact is difficult to judge in advance).

So although the data released since 5 June – in particular, a fall disclosed yesterday in CPI inflation to 1.5%, well below the Bank’s 2% target – would perhaps suggest the Governor jumped the gun last week with his alert that an interest rate rise may be just over the hill, the minutes suggest there is still a better than evens chance of a rate rise in the autumn.

Their tone implies that more important than the backward-looking picture of inflation to the Bank’s rate decision is a sense of whether the momentum of growth is being sustained – and therefore, that slack in the economy would be used up faster than the Bank anticipates.

via BBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza