Tony Ward is chief executive of Clayton Euro Risk
Are you braced for Super Thursday? This Thursday, the MPC will announce their August interest rate decision; publish the minutes of the meeting; and present their latest quarterly forecasts for economic growth and inflation. These three events have previously been held separately but the Bank Governor, Mark Carney, has said he wants to end the “drip feed” of news from Threadneedle Street.
When forward guidance was first trumpeted, many of us scoffed (alright it was me) saying that there was nothing better that the markets would love than to be told which way interest rates were heading so they could trade and profit from it. And so it happened. Since then forward guidance has become a much more muted mechanism. But it hasn’t disappeared or been forgotten. The whole point of forward guidance is to be able to influence markets and signal monetary policy without having to anything. In some ways it’s a reminder that the bank has the power to change things and in the old days it was known as watching the Governors’ eyebrows.
Noises from the Bank of England recently have been much more bearish with Mark Carney suggesting that the next rate hike could be as early as year-end. No doubt markets are now taking that as certainty: yield curves have moved up and sterling has strengthened. For sure the US Fed look likely to raise their rates very soon.
But does this make sense? I think it would be a brave move to raise rates right now. Sure we are in recovery mode but we still have £375bn of QE in the system which equates to several trillion of pounds in money supply creation that will have to be withdrawn when QE is unwound. Tightening monetary policy doesn’t just mean raising interest rates it also means withdrawing QE. No one knows what that will do in terms of economic dampening. And although our economy seems to be doing well we are suffering from a strong pound making our exports less competitive. So raising rates will help that precisely how then? Yes of course we have become accustomed as borrowers, businesses and banks to low interest rates and at some point it is worth a reminder that this is not normal. But raising them right now may be a step too far. I tend to agree with the Bank of England’s chief economist Andy Haldane who notes the “extraordinarily slow pace of monetary tightening” since the financial crisis in the UK and other advanced economies. But he says this lack of action is justified partly by “dread risk” in the economy, with households and companies still scared and unwilling to spend, and genuine “recession risk” that there tends to be a UK downturn at least every 10 years.
And let’s not forget that the Greek situation is still simmering away. The deal being proposed by the EU does not look viable: if we really think Greece can run a fiscal surplus of 3 – 4% of GDP when Germany has only managed it once since 1995 then you must know something I don’t. Prepare for more turbulence in the Euro markets.
We’re not out of the woods yet!
