Savers and borrowers waiting for rise in rates
Jeremy Stewart is head of wealth management and private banking at Danske Bank
Was it a case of talk of money changers in the cathedral? Mark Carney, the Governor of the Bank of England, gave a speech at Lincoln Cathedral at the end of last week. He said that "in the current circumstances there is no need to wait to raise interest rates because of a risk management approach". Mr Carney also went on to say that in his view "the decision as to when to start such a process of adjustment will come into sharper relief around the turn of this year". He did say something similar last year, but the economy is in much better shape now.
Savers should be heartened that there is a strengthening case for interest rates to be raised sooner rather than later. This is likely to be tempered by the fact that when the rises do start, they are likely to be modest for quite some time. Mr Carney implied that a slow rise in short-term rates to around 2.25% in the medium term would seem "not unreasonable". It really is one of those 'on the one hand… but on the other' situations. Borrowers can cope better with gradual increases capped at relatively low levels. So it's moderately good news for both savers and borrowers.
The minutes of the Bank of England Monetary Policy Committee (MPC) are due to be issued at 9.30am tomorrow. The Governor's speech means that they may attract even more interest than usual and each MPC meeting will now be subject to intense speculation and scrutiny.
Mark Carney's comments are the latest in a series of signals from the Bank of England and indeed from the independent MPC. David Miles, an external member of the MPC who is considered to be one of the 'doves' on the committee, said in a recent speech that the "first move up in bank rate soon is likely to be right". There can be no excuse for the markets not to have priced in a rise and when it does happen, the impact should therefore be muted.
The MPC's August meeting will be very important as this will be the first time that we have the new Super Thursday process. August 6 will be the date when the policy announcement, the minutes and the new inflation report will all be released at the same time.
Across the Atlantic there is a similar debate on rates. In the semi-annual Monetary Policy Report to Congress this month, Federal Reserve chair Janet Yellen reiterated the message that a first Fed Funds rate increase this year is likely to be appropriate. In general, the testimony had a more upbeat tone than what we heard from Yellen at the June press conference.
For sterling and therefore for business, the timing of a rate rise in the world's biggest economy will be important. The timing of the first Fed rate increase in the US, continuing low UK core inflation, and strong sterling are the downside risks to predicting an increase in UK interest rates before the year end.