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Is The UK About To Have Its First Rate Rise In A Decade? – Forbes

Many economists expect the Bank of England to raise interest rates for the first time in a decade on Thursday. With low unemployment and stable economic growth – and after being nearly zero for nearly 10 years, rates are due to rise. But, there are a number of reasons why the Bank may wait for a few more months at least.

First, although inflation is considerably above the Bank’s 2% target and expected to rise further to above 3%, that isn’t enough on its own. It’s because the Bank discounts inflation caused by weak Sterling. The Pound had fallen considerably after the EU referendum last June. When the Pound is weak, imports are more expensive so that raises the price level of the economy. Since the currency fluctuates – and Sterling has already regained some of its value, the Bank doesn’t act on its movements. They tend to “look through” such inflation.

Instead, the Bank focuses on wages. If firms pay more in wages, then their higher costs lead them to raise prices. Prices are essentially wages and costs plus a margin. At present, real wage growth – wages after taking into account inflation – is hardly budging. So, weak wage growth may lead the Bank to hold off raising rates. One wrinkle is that unit labour costs are over 2% amidst weak productivity growth, so that suggests that there are underlying cost pressures which could lead firms to raise prices. That suggests a rate rise is more likely, which is why Governor Mark Carney and others have pointed to a rate hike cycle as looming on the horizon.

Another factor has to do with consumer debt. The Bank has issued a number of warnings about the £200 billion consumers owe on their credit cards and other forms of debt. That figure has grown by nearly 10% over the past year. They warn that as much as £30 billion may never be repaid. If interest rates were to rise, that could lead to more defaults. Of course, waiting a few more months wouldn’t lead to a significant difference in the consumer debt load. But, giving plenty of warning about the impact of higher repayment costs may forestall further accumulation of debt and allow those who are indebted to plan accordingly.

Then there’s Brexit. The Bank has been worried for some time about the uncertainty around what will happen after the UK leaves the European Union. They have asked commercial banks to come up with contingency plans to ensure that the financial system won’t be disrupted should there be no deal with the EU in place in March 2019. But, it takes a year for banks to implement contingency plans, so the Chairman of RBS has said that absent a transition deal by March of next year, banks will have to start moving jobs out of London. Given the size of the City and the number of jobs linked to the financial sector, there will likely be an economic impact.

That could lead the Bank to wait for a few more months until next spring before raising rates. It’s also because central banks prefer to not have to reverse themselves – once they raise rates, they want markets to expect and plan for more rate rises and not wonder if rates will be cut again. Some central bankers disagree with this approach. They argue that should rates need to be cut again because the economy needs help, then it’s not problematic to reverse the direction of the rate cycle. But, the Bank of England has tended to move consistently in one direction.

Mark Carney, governor of the Bank of England (BOE). Photographer: Simon Dawson/Bloomberg

So, we may be surprised on Thursday when the Bank of England doesn’t move on rates. They may wait a little while longer. Governor Carney has been hinting that a rate rise is imminent – but that’s why markets have dubbed him an unreliable boyfriend.

Is The UK About To Have Its First Rate Rise In A Decade? – Forbes

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