Comments Re: Possible Interest Rate Increase
The services sector of our economy, which accounts for more than three-quarters of our economy as a whole, has shown growth in Q3 sparking the Guardian to suggest "that one or more policymakers at the Bank of England will vote for a rise in the interest rates in Thursday's meeting", and interest rates may rise as soon as February.
Writing for the London Evening Standard on March 12th, following the Select Committee, my opinion of the Bank and its relationship with the interest rate was anything but glowing. This is because the Banks ‘guidance’ appears to be somewhat nonexistent. This was demonstrated by the implementation of 18 fresh indicators (March, 2014) within the forward guidance policy. Indicators which would now dictate a rise in the interest rate. Previously the indicator had been unemployment falling to 7%. However, when it reached 7.1% in January the Bank incorporated those 18 indicators to further delay the rise. This told us three things:
1) Either the Bank underestimated how unbalanced the economy was, where unemployment falling had little relation to other facets of the economy such as productivity 2) The Bank was perhaps somewhat hopeful unemployment would stay above 7% long enough that these facets would balance themselves, and where unemployment falling was the final marker of a more settled and established economy, perhaps even a recovering one 3) The Bank was mistaken for believing the unemployment rate would have such a marked relational quality at all. My guess would be a combination of 1 and 2.
However, despite concerns over the handling of the low interest rate and the unremarkable forward guidance policy it appears concerning that the rates could rise as early as February. Here's why:
1) Wages: Whilst an increase in the growth of the services sector of our economy in Q3 is positive it is one of many signs of growth that is being hailed as a marker of a recovering and strengthening economy, when traditional understanding of what a ‘strong’ or ‘recovered’ economy is, have not been met. For example in terms of real wage growth. Which is related to point 2.
2) Mortgages: If wages are low then a higher interest rate affects people's ability to pay their mortgage as the monthly payments increase.
3) Borrowing: Where we fall shorts of wages, the UK has a remarkable history of finding money where it doesn’t exist either by borrowing or through credit. Where payday loans have only, in my opinion, replaced the credit boom of the 1980s and provided an outlet for easy access to money at a monumental cost to the borrower. Their existence and use is neither indicative of an economy with strength, or a sign of our own strength, and our ability to pay our outgoings.
4) Lending: Whilst there is need to borrow from banks at this time an increase in the interest rate will affect the ability of banks to lend cheaply, ultimately affecting the ability of first-time buyers, small businesses and the banks themselves to access funds. Ultimately affecting all facets of the economy.
However, it is extremely important to recognise that a low interest rate can be very unhealthy for an economy. Therefore making the choice between either keeping them low or raising them, perhaps somewhat prematurely, was never going to be easy. If the rates are risen in February it means that we are not out of the park by any means.