Analyst expectations from the

Bank of England base rate predictions

Bank of EnglandBank of England Photograph: Peter Macdiarmid/Getty Images

Like John Major’s early 1990s government, the Bank of England gives “the impression of being in office, but not in power”. Former chancellor Norman Lamont’s analysis could just as easily be applied to Threadneedle Street today.

Six years on from the financial crisis, governor Mark Carney and his colleagues are keen to give the impression that they can control events. Sadly, their big bazooka, the threat of an interest rate rise, is as powerful as a pop-gun.

Kristin Forbes, one of the Bank’s latest recruits to policymaking warned in a speech last week that interest rates must rise “in timely fashion”. Her optimism was echoed by her colleague David Miles who went a step further when he told an all-party group of MPs a day later that Threadneedle Street was still an institution that could influence the course of economic events.

He went so far as to reference a speech he gave in January entitled “What can monetary policy do”, where he expressed his confidence in their ability to steer inflation, and by implication the economy. After all, interest rates were cut to 0.5% six years ago this week. What goes down can come up again. The question must be: who are they kidding? Interest rates are going nowhere.

Unfortunately, Britain’s central bank is a busted flush and the only reason the monetary policy committee (MPC) still holds some sway is the result of successful marketing, which maintains in the public’s mind that it may some day raise interest rates.

Government ministers perpetuate this misleading impression, happy for a separate, and supposedly independent agency of the state to take the heat off them.

Looking back it is easy to see the marketing operation in action. The Bank’s MPC used its spin machine last year very successfully to cool an almost hysterical return of property buying that looked like it might run out of control. After a few misfires, when oblique references to the potential for rising rates were ignored by the public, governor Mark Carney declared that City forecasts were underestimating how close a rate rise might be.

Almost instantly, City economists scrapped their previous efforts and switched to early November 2014 as the first shift from the current 0.5%.
Consumers, shocked that a rise (first predicted by Carney for 2016) could come so soon, clamped down on spending. The economy slowed. Then Carney appeared to ease up on the threat and spending returned. Britons had a fantastic Christmas (on average), and City predictions are for a better than expected 2015.

But while there are good arguments for a higher cost of borrowing and a return to what was once the normality of 4%-5% base rates (not least giving the bank another policy tool in the event of another crash), what have we seen to make us think it will happen any time soon?

Look at the Bank’s remit. Carney and his team are supposed to deliver a stable 2% rate of inflation. On this it has failed again and again over the last five years.

There are ready explanations. In the first period of recovery after the crash, rampant oil and food prices drove up average inflation and the Bank “looked through” the blip, citing underlying weakness in the prices of other basic goods and services. Then the euro crisis struck sending business and consumer confidence into a nosedive.

Now it is “looking through” ultra-low inflation, driven by a fall in food and oil prices.

Miles was asked by MPs why he bothers to target inflation when it bounces round uncontrollably like a child in a ball pit. That’s when he harked back to his speech and how the ability to raise interest rates still gives central banks some firepower. MPs on the treasury select committee had other things on their mind and skipped asking him what he meant.

What he might have said was that the bank will look through another spike in food and oil prices unless the pressure comes from rising wages, which is a sure sign that demand pressures are bidding up costs. Tangible, domestic demand pressures are the bank’s cue for action, not the volatile international commodity markets.

For some time MPC members have debated the various influences on wage levels and whether pay rises will take off. Official figures have shown that until late last year, with inflation above target and average wage rises consistently below 2%, real wages suffered. The recent fall in inflation means real wages are rising.
For public sector workers the next few years may look as grim as the last five. Private sector workers, on the other hand, many of whom also took big pay packet cuts working part-time or accepting wage freezes, are faring better.
The Resolution Foundation has a list of positives. It cites falling unemployment, which is far lower than anyone expected, to the employment rate, which has risen in every region and nation of the UK in the last two years as reasons to be cheerful. Involuntary part-time and temporary work is also falling and the number of full-time employees is rising.

Average pay growth hit 2.1% in the last quarter of 2014 if bonuses are taken into account, 1.7% if they are excluded, which in both cases is far above the 0.5% inflation rate. Combine all these trends and there must be a good cause for heading off a rampant boom in a couple of years time with a rise in rates now.

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