The Bank Holds Rates ... Carney Hints at Rate Rise ... The Saturday Economist

The Bank of England MPC voted 6 - 2 to keep rates on hold this week. The Committee voted unanimously to maintain the stock of UK government bond purchases at ￡435 billion. The Committee also voted unanimously to maintain the stock of corporate bond purchases at ￡10 billion. 

In the August Inflation Report, the Bank downgraded forecasts for growth to 1.7% this year and 1.6% next. Concerns about household spending and investment dominate the over view. The "Old Lady" perceives a slow down in investment is materializing.

Concerns about life post Brexit in the UK and the lack of a "vision for transition" are a real cause for concern. In the medium term, inflation abates, real incomes are no longer squeezed, the strength of world trade boosts net trade and investment plans return to the board room. The long term growth rate circa 1.75% would be maintained as inflation drifts back to target 2%.

So what can we make of the Bank outlook? NIESR released their August forecasts this week. Growth is expected to be 1.7% in the current year rising to 1.9% next. Forecasts for growth, range from 1.1% to 2.1% according to the latest HM Treasury data. A great chance, someone will get it right. Growth in the second quarter was just 1.7% following growth of 2.0% in the first quarter. The Bank appears to have made a fair call for the year in prospect, given the progress year to date.

So what of rates? The Governor is hinting at a rate rise. "The Committee judges that some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target. Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections."    

Wow! At the moment, markets expect rates to stay on hold until well into next year and to remain sub 1% until 2020. Inflation is expected to peak this year and may have already done so. Strong growth in Europe and the US will create some flexibility for tightening local policy, to the benefit of the Euro and the Dollar. The Bank should take the opportunity to restore rates to 50 basis points at the earliest opportunity. Could it be as early as November ... we shall have to wait and see! ...                   

Should we be worried about personal borrowing ...

The Governor appears to be relaxed about personal borrowing despite the concerns raised by the FCA. A mere ￡1.6 trillion, it's around 80% of GDP after all. Compared to the volume of gilts in issue at ￡1.9 trillion, of which the central bank holding is ￡466 billion, perhaps there are other concerns more pressing.

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