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How far can interest rates rise? How far should interest rates rise? Brexit is as irrelevant to the MPC’s task as the phases of the moon

The Economist

I’ve just been listening to a radio interview with Mark Carney, governor of the Bank of England, in which he prevaricated endlessly about whether UK Bank Rate was going to rise. Not specifically in May, but at all. Since taking on the role in 2013, Bank Rate is precisely where he found it: at 0.5 per cent. He maintains that the decision to raise UK interest rates remains finely balanced, with the outcome of Brexit negotiations a key input to the deliberations of the Monetary Policy Committee. I beg to differ. Brexit is as irrelevant to the MPC’s task as the phases of the moon, though admittedly less predictable.  

Over the past 8 months, the 2-year yield on US Treasury bonds has virtually doubled from 1.25 per cent to 2.43 per cent. The economy has been firm, Jerome Powell has replaced Janet Yellen and the administration has passed two outrageously expansionary fiscal bills. Bond investors took a view and sold short-dated Treasuries. The members of the Federal Open Market Committee came to work to find the job already done!  All that remained was to fill in the paperwork.

If this is true for the largest economy in the world, and the most influential central bank in the world, what does it tell us about the Bank of England? UK money markets recently revised up their pricing of the end-2019 short-term interest rate to the giddy heights of almost 1.4 per cent (figure 1). At a slight stretch, this would imply 3 quarter-point increases in addition to the much-telegraphed May hike.  Are UK money market rates rising because the domestic consumer is in fine fettle? Plainly, not. Are they rising because inflation is above the upper band of the Bank’s target range? Not anymore. In fact, the latest consumer price print, at 2.5 per cent, was a little softer than expected. UK Bank Rate is rising because the global economic engine is purring. The fact that the UK, with Australia, is losing momentum is a detail. The interest rate train has finally left the station.   

Figure 1 






The Economist

About Peter Warburton

Peter Warburton

Dr Peter Warburton is director of Economic Perspectives Ltd, an international consultancy, and managing director of Halkin Services Ltd. He was economist to Ruffer LLP, an investment management company, for 15 years and spent a similar length of time in the City as economic advisor and UK economist for the investment bank Robert Fleming and at Lehman Brothers. Previously, he was an economic researcher, forecaster and lecturer at the London Business School and what is now the Cass Business School. He published Debt and Delusion in 1999. He has been a member of the IEA’s Shadow Monetary Policy Committee since its inception in 1997. He is a contributor to the Practical History of Financial Markets course run by Didasko, an education company, at Edinburgh University, and teaches occasionally at Cardiff Business School.

Articles by Peter Warburton

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