Later this week the Bank of England looks set to pull the trigger on the first rise in interest rates since 2007, when it is expected that the base rate will be lifted back to 0.5%, in the process reversing last year’s emergency rate cut from August 2016.
It would be easy to say we’ve been here before with respect to the Bank of England in terms of laying the groundwork for a rate rise before policymakers pulled back at the last minute. This previous indecisiveness has prompted accusations that the bank has a tendency to cry wolf and as such has damaged the banks credibility in the eyes of some in the markets.
Last week new MPC policymaker’s deputy governors Jon Cunliffe and David Ramsden suggested that they might vote against such a move, which suggests that any vote this week is unlikely to be unanimous.
A number of people have suggested that a rate rise this week would be a policy mistake, though it is interesting to note a lot of these people are the very same people who were very vocal in calling for the bank to cut rates last year in the wake of Brexit vote. This rather begs the question as to why you would take advice from the very people who got last year’s rate cut decision so badly wrong.
In my view last year’s move was a policy mistake, and while there are plenty who would disagree with me on that assessment, it is hard to ignore that the additional sterling weakness we saw in the aftermath of that decision helped exacerbate the inflationary shock in the aftermath of the Brexit vote, and is in no small part responsible for the income squeeze we are seeing now.
With inflation set to rise even further and other central banks like the US Federal Reserve and European Central Bank looking to ease back on their own stimulus plans, the Bank of England needs to get its act together and concentrate on its mandate and keep a lid on inflation expectations.
If that means it needs to raise rates to do so then that is what it should do. Financial markets have already priced in a rate rise, which means the Bank of England needs to deliver this week, or its already tattered credibility will get shot to pieces.
Interest rates are still near record lows, a rate hike this week won’t be the end of the world and opponents of such a move need to stop pretending it will.
The UK has much bigger problems to deal with than the current level of interest rates. Sadly due to the low calibre of our senior politicians on both sides of the political divide, none of these problems look anywhere close to being resolved.
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