Kenny Rogers once sang, ‘you gotta know when to hold them, know when to fold them’ (you can thank my parents for playing such music that I can make that reference with ease) and this seems readily applicable when it comes to the current situation one Mark Carney, Governor of the Bank of England now finds himself in: should he gamble with interest rates?
He appears to have predicted that said interest rates will in fact rise by the end of the year. In a lecture entitled, ‘From Lincoln to Lothbury: Magna Carta and the Bank of England‘ (clearly opting to be trendy with the Magna Carta anniversary craze) delivered at Lincoln Cathedral last night as part of the annual Lincoln Lectures, the Governor of the Bank of England appeared to suggest that interest rates looked set to rise ‘at the turn of the year’ – perhaps as early as December or January 2016. Is this a means of seeking to prepare the UK for higher borrowing costs in advance?
If there should be an increase by the end of the year, this would mark the end of what has been the longest period of unchanged rates since the Second World War. Therefore Mr Carney can rest assured that that is another piece of history-making he can add to his CV, after he became the first non-British governor of the Bank of England after his appointment in June 2013.
Fact of the Day, part one: Interest rates have been at 0.5% for six years as the UK economy slowly and tentatively recovers from the global financial crisis.
Fact of the Day, part two: Short term interest rates have averaged around 4.5% since around the UK’s central bank’s historic beginnings, some three centuries ago.
‘In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.’
Regarding his prediction that interest rates would increase, Carney said he expects that rates will rise over the next three years and ultimately reach ‘about half as high as historical averages’, or about 2%.
But before we all sigh in relief in the belief that perhaps everything and anything economical is on the mend, Carney just had to go and add that any shock to the UK economy could in fact change the timing and the size of any rate rise. So, in essence, his prediction is just that – a prediction for the future which is not set in stone.
‘It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages.’
~ Translation: when everything seems to be going back to the way it was pre-2008, you will have to pay more to borrow. But we’ll do it gradually. And it will not be as high as we used to have it, okay so?
Mr Carney went on to emphasise that the Bank of England would be closely monitoring the effects of any interest rate rise, should it happen, on household balance sheets. So that’s aright then.
Carney’s Mystic Meg moment just happens to come only a day after it was announced that unemployment figures have risen for the first time in two years. (You can bet that Labour seized on such figures with glee. In all fairness, it is probably the only good news that they have had/will have for quite the while.)
It is now being suggested that the rise in unemployment is proportional to the increase in skill shortages, in turn leading to rising wage inflation. So, in theory, fixing up the mess which was a consequence of the 2008 meltdown should be easy. Ensure workers are well-rounded, well-trained and with specific skills for specific jobs. (It would be best that work is not outsourced, too.) Therefore -theoretically speaking- these trained and skilled workers can be clicked like those last few jigsaw pieces into their niche professions, unemployment would drop and everyone would thus receive a glittering pay-packet.
Back from dreamland, though and to Mr Carney’s comments. His words caught the markets unaware and resulted in the Pound gaining in value against the Dollar, after having previously dropped against the Dollar.The pound was also 0.5 per cent higher against the euro at €1.435, a seven-and-a-half-year high – just in time for any British holidaymakers about to go gallivanting in Europe.
Whilst a rate increase would be the clearest sign that the economy has healed after the 2008 financial crisis seen thus far, the decision to adopt this increase is one that only be taken after intense examination and careful risk assessment.
Carney must now decide whether to hold them or fold them. No doubt he is only too aware that whatever decision is taken, there will be an aftermath.
*You can read Mr Carney’s speech in full, if you so desire here.