Mark Carney cannot go back now. Investors in the financial markets are confident that the Bank of England will raise its key interest rate from 0.25 percent to 0.5 percent on Thursday. Everything else would be a huge surprise. Should the monetary policy committee, chaired by the central bank governor, decide otherwise, this would trigger turbulence?
With the increase, the Bank of England would follow the US Federal Reserve. The US Federal Reserve had already reversed the switch in 2015, the US interest rate is now at 1 to 1.25 percent. The European Central Bank has not yet raised interest rates, but has cut back on its bond purchases, signaling an end to cheap money.
Ten years ago, the Bank of England raised its key rate for the last time. Then came the financial crisis and the monetary authorities cut interest rates to 0.5 percent to stimulate the economy. Since then, there has been speculation about an imminent normalization, Carney himself gave multiple signals. But there was always an argument to postpone the interest rate increase again.
After the Brexit vote in the summer of 2016, the bank cut interest rates even further – to 0.25 percent, the lowest level of its three-hundred-year history. Thus, the expected economic shock should be mitigated.
Now, however, it seems to be so far: Inflation is three percent, well above the two-percent target of the central bank. Therefore, she now sees the time to counteract. The proponents of a rate hike consider the risks manageable: The UK economy is growing better than expected, the Brexit depression has so far failed. Growth in the third quarter was 0.4 percent. Unemployment remains at the low of 4.3 percent.
After its last meeting in September, the Bank of England had announced that interest rates would rise “in the coming months”. With that she had raised expectations. When the latest economic data also turned out to be positive, investors priced in the interest rate hike. The market is 90 percent of the pace, says Mark Wall, Chief Economist of Deutsche Bank. The central bank will have to follow its words with deeds if it wants to be taken seriously.
London think tank NIESR expects the Bank of England to follow another rate hike every six months. Others are not so sure about that and name the Federal Reserve as an example: after the first rate hike, it had waited a full year until the next one came.
For the latter scenario suggests that the monetary guardians do not seem one hundred percent convinced of the increase. There are two schools of thought in the nine-member Monetary Policy Committee: some consider the turnaround in interest rates overdue, while others warn against strangling the economy. In fact, there are first signs of weakness: retail sales are plummeting, even London real estate prices fall for the first time since the crisis. Apparently Brexit does not leave British consumers cold. Any increase in interest rates will additionally burden households: loans will become more expensive, and the appetite for spending may decline.
And the Brexit risks are significant, as Carney never tires of stressing. From the negotiations in Brussels also depends on the further action of the central bankers: As long as it is not clear how hard the cut with the EU, they have to drive on sight. They are in the Brexit trap.