Is Mark Carney attempting to slow the start of higher interest rates?

Adrian Hull: Is Mark Carney trying to slow the rise in interest rates?

Adrian Hull, senior fixed income investment specialist at Kames Capital, explains why an interest rate rise is off the cards – for now.

‘Asleep at the wheel’ has been the accusation levelled at central bankers such as the Bank of England (BoE) over the financial crisis of 2008. But eager to prove its new found vigilance, the BoE announced a tightening of its controls on bank credit by announcing changes to its counter cyclical buffer (CCB).

The CCB aims to ensure banks are considered in their lending; it requires that banks increase their capital by 0.5 per cent by this time next year and, all other things being equal, to 1 per cent by November 2018. That would equate to £11.4bn extra capital required to back loans in the UK. The extra cost for loans written in the UK should trickle through to higher costs for consumers – the area identified by the Bank as being a source of concern. All very prudent and exactly the sort of pro-active approach that central bankers should implement in boom times.

STEPPING AWAY FROM AUSTERITY

So far politics suggest that we are still in a fiscally restrictive environment; but last week’s British Social Attitudes survey, with a section entitled ‘a backlash against austerity’, suggests this may be changing.  The ‘increase taxes/spend more’ brigade have overtaken the ‘keep taxes/spend the same’ contingent in the last year. The debate about the public sector 1 per cent pay cap is another step away from austerity and whilst the chancellor may be a steady hand on the tiller, in the absence of a surge in economic growth, budgets are going to remain tight.

Think what you like about budgets and austerity but it isn’t the stuff of boom times. So what’s the BoE worried about?

A very low savings rate is at its heart, coupled with a material increase in consumer lending through credit cards and car loans. A further confusion is that unsecured loans are available within basis rather than percentage points of secured mortgage costs. This may be a product of High Street bank competition or do ultra-low rates encourage further borrowing. But in an economy growing at below 2 per cent with declining real wages, what are the Bank’s concerns?

Most recent public statements over the path of interest rates centre on whether to reverse last summer’s rate cut and that includes the CCB change. But Carney’s raising of the CCB must – even if only at the margin – slow the start and path of rate rises.

UK INTEREST RATES WILL NOT FOLLOW THE US

In addition, Carney’s message on UK rates last week also suggested that it would be a burst of business investment (rather than consumer spending) that could push rates up. Nonetheless, despite all the posturing, base rates at 0.25 per cent or 0.5 per cent is the discussion; the UK is not about to replicate the US rate cycle where short rates are up 1 per cent since 2015.

The BoE aims to take a leisurely approach to the CCB increase. Like many of Carney’s initiatives it may be that the message is more effective than the action; he sees some risks but there’s no need to rush; time may mean these risks just disappear anyway.

Brexit headwinds remain a challenge for UK policymakers and that is evident in the public tussle over rates between the MPC members, Mark Carney and currency markets where each nuance and announcement proves volatile.

It is difficult and unwise to view the CCB action in isolation. It is just one weapon in a complex battle and there is also a suspicion that the BoE may just be fighting the last war and not the next and the orders from the generals are proving contradictory.


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