Rates up, Sterling falls, the Bank hikes UK rates to 0.75%, Markets had expected a rate rise this week. The unanimous decision to increase base rate was a surprise to many. The concerns of group think in Threadneedle Street are enhanced.
So what prompted the move this week? According to the Governor, employment is at a record high, there is limited spare capacity, real wages are picking up. Domestic inflation pressures are increasing. The prospect of excess demand is emerging. Earnings may have increased to 1.75% around the middle of this year.
UK growth is estimated to have rebounded in the second quarter. An underlying trend is emerging following the weather affected performance in the first quarter. The Bank expects growth of 1.5% this year.
"With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there."
Is this the right decision? Well probably but for the wrong reasons. Growth in the second quarter is unlikely to have accelerated much in Q2. This according to the short term GDP trackers from the ONS and NIESR. The Governor may cite a recovery in construction output in May but monthly building data is incredibly volatile and subject to revision.
Danny
Blanchflower has condemned the move. "Raising rates is a big mistake.
The decision is made on the basis wage growth is about to skyrocket. It
isn't. The decision will have to be reversed."
Is it really about wages? The Bank is concerned about the rising possibility of a "no deal" Brexit and a shock to output. The Banking system is "mission ready" with adequate liquidity to absorb a Brexit setback. The Central Bank would like to be in a position to cut rates to ease pressures within the economy in the event of a Brexit shock. It has to put rates up first before it can bring them down again.
It is what one might call the "Grand Old Duke of York" Strategy. "March rates up to the top of the hill and March them down again". They won't get very far up the hill before there may be a need to act! The bank is suggesting one rate rise per annum
over the next decade. Rates would cap out at just over 3% by the end of the next decade. Forward guidance returns, now with a much longer perspective.
The Governor's bearish statements on a hard Brexit pushed Sterling to $1.29 against the Dollar before a pullback about the $1.30 floor by end of week.
Jacob Rees-Mogg was unimpressed. "Mark Carney has long been the high priest of project fear. His reputation for inaccurate and politically motivated forecasting has damaged the reputation of the Bank of England". Ouch! Some Brexiteers, so tough to please ...
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