FTSE 100: 7682.27 ▲ 125.83 (1.67%)

Carney’s conundrum: when will interest rates rise?

Carney’s conundrum: when will interest rates rise?

by Michelle McGagh May 10, 2018 at 15:01


With weak data and Brexit uncertainty, it’s no surprise the Bank of England decided to skip an interest rate rise but experts are split on whether a rate hike will happen at all this year.

Bank governor Mark Carney (pictured below) may have guided towards a 0.25% rate rise in May but the monetary policy committee (MPC) has climbed down and announced it is keeping rates at 0.5%, with the nine-member panel voting 7-2 in favour.

The Bank had upgraded its growth forecasts in March and two members of the MPC voted for an immediate rate rise, which led the market to price in a 90% change of rate rise in May.

However, in just a short space of time continuing Brexit agreement concerns, a steep cooling of inflation, and disappointing first quarter UK growth of 0.1%, which the Office of National Statistics said couldn’t be blamed on the weather, pushed the chance of a rate rise to just 8% at the start of the week.

The announcement made little impact with the FTSE 100 gaining just nine points to 7,672 although the pound weakened again, down 0.37% to $1.3497 against the dollar.

Ben Brettell, senior economist at Hargreaves Lansdown, said the MPC report was ‘uninspiring’, noting that wage growth and domestic cost pressures were firmer but do not yet justify a rate hike.

‘We might not see a rate rise for the rest of the year,’ he said. ‘But while savers will be disappointed, it’s pretty good news for investors. Stock markets don’t tend to like rising interest rates much, so an environment where rates rise only gradually should be supportive for the UK stock market.’

Craig Inches, head of rates and cash at Royal London, said the Bank was guilty of ‘forward misguidance’ that would continue to increase volatility in the bond market and create economic uncertainty.

He believes a rate rise could happen next month if a rebound in the soft first quarter data is seen.

‘If this rebounds as they expect then it is likely we could see a rate rse at any one of the upcoming meetings, including June,’ he said. ‘The Bank is poised and any glimmer of stronger data will be met with less accommodative policy.’

Karen Ward, chief UK and Europe market strategist at JP Morgan Asset Management, said the announcement was a ‘minor diversion on the route to normalisation’ and ‘not an entirely new route’.

The Bank is expected to tighten rates gradually over the next three years, with just three 0.25% rises expected over the period. However, Ward said ‘we think it is likely that rates will rise by more’.

‘We expect the recent weakness in the data to largely prove temporary and a Brexit deal to be sketched out in October,’ she said.

‘We expect the Bank to raise rates by 0.25% in November of this year, and if the global backdrop is similarly robust going into 2019 then, much like the US Federal Reserve, the Bank could settle in to a more significant pace of normalisation next year.’

Chris Williamson, chief business economist at IHS Markit, said the ‘door is left open’ for tightening of policy this year despite the Bank downgrading its full year growth from 1.8% to 1.4%.

The medium-term outlook for 2019 and 2020 is unchanged and he said this means a rate rise is most likely in August, although it will rely on a pick up in both wages and economic growth.

‘The Bank is also worried that the underlying pace of economic growth may have in fact waned so far this year,’ he said. ‘Data suggests that some of this slowdown can be linked to weaker economic growth in Europe, but companies are also reporting that domestic demand...has continued to be dampened by the economic outlook and higher prices.’

Add a comment

Comments  (6)

  • Novgorod: 

    Mark Carney and the Bank of England have lost the plot - they're all over the place with their growth, inflation and interest rate forecasts.

    They really lost their credibility by siding with the government in its project fear campaign ahead of the Brexit referendum - they should have stayed strictly neutral simply stating they would ensure financial stability and support the economy whatever the outcome and said no more than that.

    When Brexit happened they had to act on their dire forecasts by going over the top by restarting quantitative easing (unnecessary), cutting interest rates (debatable) and providing liquidity to the banking system (that was necessary).

    This big monetary stimulus brought consumption forward, as it is partly designed to do, and we're now seeing this playing out as it slows down.

    I must admit I was baffled by the BoE talking about interest rate rises for most of the year while the economy was clearly slowing. UK debt is too high and the economy needs rebalancing away from heavily indebted consumers towards investment, investment income from abroad and exports. The latter is partly happening.

    I think they need a new governor and soon - Carney is all over the place, clearly doesn't have a grasp of what's happening in the real economy and should go. He and his acolytes are damaging the BoE's credibility and our confidence in their actions and forecasts.

    16:00 on 10 May 2018

  • Jonathan: 

    Every month experts are always "split on whether an interest rate rise will occur". The Bank of England are a joke, for the last 10 years they have been giving "Forward Guidance" about future rate rises and most of the time they are predicting a rise. Yet in the last 10 years there has one been one rate rise of just 0.25%.

    This "Forward Guidance" is supposed to help industries and people gear up in advance for the future interest rate. Anyone who has followed their guidance would be bankrupt by now. They should rename "Forward Guidance" to "Propaganda to support the exchange rate of the GBP".

    I'd really feel much less stressed if Mark Carny got up an announced his Propaganda to support the exchange rate of the GBP speech instead of calling it "Future Guidance".

    16:55 on 10 May 2018

  • Paul Sweeney: 

    Carney? USELESS!

    On the BBC it says:

    'Bank of England governor Mark Carney says the UK economy will pick up'.

    Yet another load of nonsense from this guy. Politicians and economists just talk utter nonsense. Two years since Brexit and where are we actually going? Nobody knows.

    23:19 on 12 May 2018

  • Paul Sweeney: 

    Carney? USELESS!

    On the BBC it says:

    'Bank of England governor Mark Carney says the UK economy will pick up'.

    Yet another load of nonsense from this guy. Politicians and economists just talk utter nonsense. Two years since Brexit and where are we actually going? Nobody knows.

    23:19 on 12 May 2018


    explain how Mr Carney can make the economy grow please

    18:22 on 13 May 2018

  • CT: 

    Carneys comments on the BBC yesterday are damaging and probably, like the forecast he wrongly banked on in 2016, grossly incorrect. Can we please have someone who understands 'modern economics'

    16:20 on 24 May 2018

Please use a browser with javascript enabled in order to post a comment

Mobile | Desktop