Bank of England: No rush to raise interest rates

Bank homeYesterday’s speech makes it clear that Bank of England Governor in no rush to join Fed in raising rates, good news many will think who borrow, but perhaps not so good for lenders.

Jeremy Cook, chief economist at the international payments company, World First was kind enough to put some flavour around the statement:

Sterling and rate expectation of a Bank of England interest rate rise have taken a 1-2 punch in the past 24hrs from both the Governor and the newest member of the Monetary Policy Committee.

Vlieghe’s comments yesterday that he did not ‘see convincing evidence yet of upward momentum in pay pressures….. I do not believe the conditions are in place to warrant a rise in bank rate’ were expected from a dovish member of the tribe; Carney’s thoughts are more interesting given the tonal change.

Carney’s speeches in the past – the Mansion House speech in 2014 and the speech at Lincoln Cathedral last year – had shown him to be leaning towards higher rates sooner rather than later. The stymying factor has been inflation and today Mark Carney has chosen to not look through the lower headline inflation rate in favour of a rising core inflation rate. Inflation is the be-all and end-all it seems. Indeed, if you include the references and appendices, the word ‘inflation’ is featured 110 times in Carney’s Peston Lecture. There’s something to be said for driving the message home.

As luck would have it, morning’s inflation numbers actually saw a rise in Core CPI – inflation discounting away food and energy prices – to the highest level since January of last year and we can see this number increasing as elements like higher business rents and the National Living Wage begin to become a factor. We will have to wait and see whether these turn the heads of policymakers.

In the meantime, we have tomorrow’s UK wage numbers to look forward to with the outlook set to have slowed further as August’s bumper number falls out of the calculations. It is also possible that gains in employment start to slow from here on in as the UK economy bumps up against the natural rate of unemployment at around 5.0%. This will not do anything positive for rate expectations or sterling.