In my last blog I mentioned the pressure was on to increase bank base rate and that remains the case. Latest figures show the U.K. economy grew more than forecast in the third quarter, which may add fuel to speculation that the Bank of England is about to raise interest rates for the first time in a decade.
Gross domestic product (GDP) rose by 0.4 percent, slightly higher than the 0.3 percent forecast. Services rose 0.4 percent, industrial production jumped 1 percent while construction shrank. This welcome out performance is hardly seismic but is it enough to see the rates rising for the first time in ten years?
This will be important information for the next Bank of England meeting. It is an indicator of the health of the economy, and as a result the pound climbed, albeit like an injured mountaineer, laboured and with caution! A 0.2 percent gain at $1.3165 is not a major shift but should this be enough to raise rates?
Growth is still running at a weaker pace than it was in 2016. It is also slower than when the BOE raised interest rates in the past, though Mark Carney’s recent suggestion of a rate hike is mainly centred on the erosion of slack.
There is a “better chance than not that they go in November, but they still have to make the decision,” Mike Amey, managing director at Pimco in London, said in a Bloomberg Television interview. “The first one is always going to be difficult.”
Many are pointing towards an interest rate rise being a big mistake, potentially leading to the start of a recession for the UK. There are a lot of unknowns in the UK economy with Brexit and growing personal debt, which makes the timing of a rate rise tricky. The growth that we have had is sluggish and slow and by no means embedded. We don’t want to see this choked off.
There are many that argue inflation is being driven by the weaker pound rather than being domestically driven so a rate rise would not impact on inflation. Based on this argument there seems little point in squeezing the British purse alongside low wage growth.
Ultimately however, we cannot stay on this “emergency” base rate for ever. It was lowered as a panic response to the Brexit vote. Those anticipated events have not transpired so why leave rates so low? A rise now would show confidence in the economy and delay subsequent increases.
With many savers wanting the rate rise and borrowers not, Mark Carney could make himself the most popular man in Britain for the savers and the Grinch that stole Christmas for the rest!
Wendy Devlin Dip CII, CeFA, CeMap (MP & ER)