UK rate rise may yet prove a mistake
Mark Carney had painted himself into a corner and a rate rise now could backfire
Governor of the Bank of England Mark Carney: failure to follow through this time would have cemented his reputation as the master of mixed messages. Photograph: Stefan Rousseau/AFP/Getty Images
Since taking over at the helm four year ago, Bank of England governor Mark Carney has laid the groundwork for an interest rate rise on several occasions only to pull back at the last minute, prompting the barb “unreliable boyfriend”.
Until this week he’d only delivered one rate change during his time in charge, a rate cut in the wake of last year’s Brexit referendum.
Nonetheless, having carefully prepared the markets for the UK’s first rate hike in 10 years, there is now growing concern that he may have got it wrong.
While UK inflation hit 3 per cent in September, above the BoE’s 2 per cent target rate, this is being driven by the Brexit-related slump in sterling and not by underlying prices and wages, normally the target of rate changes, which have remained sluggish.
Hence rates are going up when real incomes are being squeezed, which may dampen personal consumption, the engine of the economy, just as the UK heads down the wormhole of Brexit.
After the BoE last increased rates in 2007, it was forced to quickly double back on itself, cutting them by 4.75 percentage points in the following 18 months as the financial crisis plunged the UK into recession. Might latest increase also prove a mistake?
Rock star banker reputation
The problem for Carney is that he has painted himself into a corner by continually promising to increase rates without delivering. Failure to follow through this time would have cemented his reputation as the master of mixed messages, a far cry from the rock star banker reputation he enjoyed at the beginning of his tenure in charge.
Raising the UK interest rate for the first time since July 2007 should have been a show of strength, a milestone in the country’s recovery from the crash. Instead, the quarter-percentage point increase merely cancels out the cut that followed last year’s referendum.
The Brexit conundrum has undoubtedly changed the economic outlook and Carney littered Thursday’s press conference with references to the extraordinary circumstances the BOE is facing, saying these are “exceptional” and “not normal” times.