Brian BollenThe only certainties in human life are death and taxes. Interest rate movements do not feature in this elite group. However certain the world's experts are today that the Bank of England will announce an interest rate rise tomorrow - making it the first since May 2007, to 5.5% - it isn't over till the governor sings.
The shadow monetary policy committee assembled by The Times argues in the newspaper this morning that the Bank must raise interest rates by a quarter of a percentage point to 0.5%. This committee says the need for emergency stimulus is over and the Bank's credibility is at stake.
But the real MPC voted by a hefty margin of 7-2 at the last meeting. Has so much really changed in the weeks since September 14? Does reported UK growth of 0.4% in the third quarter of the year, against the expected 0.3% - really justify tightening?
BofE governor Mark Carney, courtesy of BofE
Rate rise unanimity
Market commentators are almost unanimous in their belief that, combined with the rise in inflation largely caused by the fall in the value of sterling in the wake of the Brexit vote in June 2016, it does exactly that. Who are we to question their credentials?
Currency specialist Xe said yesterday evening: “As of today, the markets are pricing in a 90% chance of a rate hike.”
The aptly named Bill Street, head of Investments for EMEA at State Street Global Advisors commented following the publication of State Street's Brexitometer index that sterling's rise from its lows earlier in the year partially reflects US dollar weakness but also greater than expected resilience from the UK economy and expectations of a rate rise.
Hallowe'en Porridge
The ever quotable Bill Blain, head of capital markets and alternative assets at Mint Partners and a regular commentator on the long-term distorting impact of quantitative easing, addressed the issue in his Hallowe'en Porridge bulletin.
“Back to the Bank of England – it’s the last inflation meeting this year, and there is a good chance they will hike from the historic low of 0.25%,” he wrote.
“Why? Many folk fear it's premature and an unjustified risk – but with employment at a record tight 4.3%, rising inflation and concerns about the effects of ongoing monetary policy stimulus and unintended consequences – perhaps it’s time to hike to 0.5%.”
Racing certainty
Make no mistake. If the experts are to be believed, if ever anything were an absolute racing certainty, this is it. But no one who remembers the certainty that Liverpool FC would beat Wimbledon in the FA Cup final in 1988 FA Cup will be betting the mortgage on the outcome.
Liverpool lost, of course, as Wimbledon FC pulled off one of the biggest footballing shocks in recorded history.
This is not the only caveat on offer to contrarians. Another comes from Azad Zangana, senior European economist and strategist at global investment house Schroders, referencing the description of governor Mark Carney as an unreliable boyfriend (Pat McFadden, Labour MP, 24 June 2014.).
Dovish to hawkish surprise switch
Azad Zangana comments that the sudden shift in MPC communication language from dovish to hawkish in recent weeks caught investors by surprise, and has prompted many economists to revise up their interest rate forecasts.
“The rising probability of an earlier rate rise in markets has not only caused bond yields to rise, but also the pound to strengthen against most currencies,” he comments. “On a trade-weighted basis, sterling has risen 4.8% since the end of August, but against the US dollar, it is at its highest level since the aftermath of the Brexit referendum.
“With markets primed, will the Bank of England follow through and finally raise interest rates, or will it return to being the “unreliable boyfriend?”
Room for manoeuvre
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Azad Zangana, courtesy of Schroders
“There are enough caveats in the BoE’s recent hawkish statements to provide it with an escape from a hike in November,” he goes on to say. “The economy has seen a dramatic slowdown since the end of 2016, and when stripping out inventories, final demand has been even weaker – stagnating in the latest quarter.”
Yet another comes from market research specialist GfK, also suggesting the UK economy is far from firing on all cylinders. It reported this week that its long-running Consumer Confidence Index slipped by one point to -10 in October.
Both measures for its General Economic Situation decreased, while the measure for Personal Financial Situation over the last 12 months and the Major Purchase Index increased. The score for Personal Financial situation over the next 12 months stayed the same.
No get up and get from consumers
Joe Staton, head of market dynamics at GfK, says: “As concerns about the wider economic prospects for the UK economy dampen our outlook, consumers are showing no real ‘get-up-and-go’.”
Consumers also figure in the thinking of Monique Wong, multi-asset investment manager at Coutts. She says: “The bank has highlighted high levels of consumer debt and may be wary of adding to debt servicing costs at a time when real people are feeling the squeeze of high inflation and low wage growth.”
In this context, only one thing is certain. The outlook is unclear...
Monique Wong, courtesy of Coutts
