In the same week that consumer credit was shown to have increased £1.6 billion for the month of September, the Bank of England (BOE) raised interest rates to 0.5%. The bank’s policy summary makes a direct connection between Brexit and the decision to hike rates:
- The decision to leave the European Union is having a noticeable impact on the economic outlook. The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling.
- In line with the framework set out at the time of the referendum, the MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target.
- All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.
As previously discussed over the months, inflation is being used by the bank as a rationale to begin the process of monetary ‘normalisation‘. The summary also confirms that the bank will respond to ‘developments‘ within the economy that in their view would warrant further rate hikes. This includes the bank’s ‘outlook for inflation‘. The bank’s official remit remains unchanged, which is to ‘ensure a sustainable return of inflation to the 2% target.’
Incidentally, the hike comes less than three weeks before the government’s autumn budget. Calls for increased spending (borrowing) have grown throughout 2017 to both alleviate pressure on public services and to give workers in the public sector a pay rise. As I pointed out in an article back in September – ‘The Austerity Capitulation Begins as the Bank of England Creep Towards ‘Policy Normalisation‘ – the rise in inflation has created a paradox. The Bank of England use it as a reason to raise rates, whilst workers use it as a reason for demanding a pay rise. More public spending means higher levels of borrowing. It is a breeding ground for conflict. Conservative MP’s and the Labour party have urged the government to ‘take advantage of record low interest rates‘ when it comes to ‘investing‘ in the economy. But that era is now at an end.
This rate hike will not be the last. In my view more are coming in 2018. And the current inflation level of 3% and the scapegoat of the Brexit process is giving the bank ample excuses to tighten policy. In truth, the ‘normalisation‘ of monetary policy is a global agenda, of which the BOE is one expression of. As CNBC pointed out (see below), the bank’s decision today brings them into line with the Federal Reserve. The European Central Bank are yet to raise rates but are tapering more aggressively their asset purchasing programme. Whichever way you look at it, central banks are cutting support for the markets, whether it’s through higher borrowing costs or the scaling back of stimulus.
- Alongside Governor Mark Carney, the majority of rate-setters at the U.K.’s central bank voted in favor of hiking the benchmark rate to 0.5 percent from 0.25 percent.
- Speaking at a news conference shortly after the interest rate announcement, Carney said: “It isn’t so much where inflation is now but where it is going that concerns us.”
- The Bank said its nine rate-setters voted 7-2 to increase its benchmark rate. As expected, the two Monetary Policy Committee (MPC) members voting to keep borrowing costs unchanged were Jon Cunliffe and Dave Ramsden. However, most rate-setters decided it was the “appropriate” time to tighten monetary policy.
- The BOE’s decision to rate hikes Thursday sees the central bank fall in line with the U.S. Federal Reserve and to some extent the European Central Bank (ECB), which are either raising rates or beginning to scale back stimulus.
- “The market seems to be, in my view, making the same mistake it made earlier in the year which is focusing too much on growth and not enough on inflation,” Kallum Pickering, senior U.K. economist at Berenberg, told CNBC Thursday. “The possibility that the Bank of England could hike more than the market’s currently expecting seems to be quite high,” he said.
- Credit card lending expanded by 9.2 per cent on the same month a year earlier, up from the rate of 8.9 per cent in August and the fastest since April.
- Overall unsecured credit rose by £1.6bn in September, taking the annual rate to 9.9 per cent, down from 10 per cent in August.
- The growth rate is down from the 10.9 per cent peak last November, but the Bank has been warning about the pace of unsecured consumer credit growth, which has largely been driven by new car loans in recent years.
- In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
- The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate
- The balance sheet normalization program initiated in October 2017 is proceeding.
- Thousands of free-to-use cash machines could be axed from Britain’s high streets under plans to cut the fees they receive, the ATM industry body has warned.
- LINK, the UK cash machine network behind the plan, said its proposals came because of an expected sharp fall in consumers’ demand for cash as people increasingly use contactless and online payments.
- Figures from UK Finance predict that over the next 10 years, the number of cash payments would fall by 43% to 8.7 billion payments.
- The ATMIA (ATM Industry Association) said cash remained a vital part of the economy and many people, especially the most vulnerable, depended on free access to it.
- The best way to beat US sanctions against Iran and Russia is joint efforts to dump the American currency in bilateral trade, according to Iranian Supreme Leader Ali Khamenei.
- “By ignoring the negative propaganda of the enemies, that seek to weaken relations between countries, we can nullify US sanctions, using methods such as eliminating the dollar and replacing it with national currencies in transactions between two or more parties; thus, isolate the Americans,” he said on Wednesday at a meeting with Russian President Vladimir Putin in Tehran.
The dollar’s direction will be swayed more by U.S. President Donald Trump’s foreign policy than it will be by the next chair of the U.S. Federal Reserve, according to economist Barry Eichengreen.
“People are focusing too much on the next Fed chair,” Eichengreen said. “Whoever it is, (he or she) is going to be a monetary mainstream person and I don’t think that will move the dollar too much. What I do think will move the dollar is geopolitics,” he said.