The Unreliable Boyfriend(s) - The future of Interest rates.

By Gerald de la Pascua, July 2017


Andy Haldane (BOE Cheif economist) and Mark Carney (Governor BOE), who do we believe ?

It was Pat McFadden MP, who first likened Mark Carney to an “unreliable boyfriend” for giving mixed messages for interest rate guidance,  

“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand” [1]

One of the achievements of the labour government of Tony Blair,  one of those things that the opposition were against, but then didn’t even consider undoing,   was the independence of the bank of England,  this got rid of the temptation of governments to manipulate interest rates to fit the electoral cycle. There have been lingering questions as to exactly how independent the Monetary Policy Committee [3] who makes the decision actually is.


As we all know, since the financial crisis base rates had been at a historic low of .5%,   then in the wake of the brexit referendum result the boe cut rates as an emergency measure to .25%.   Whether this is the reason for the benign economic indicators in the immediate aftermath is open to debate.  However the biggest negative effect, which an interest rate cut contributed to,  was the falling pound,  which in turn has fuelled inflation.   It took the market by surprise when the Bank of England revealed that Bank policy makers voted only 5-3 against raising interest rates back to 0.5%, [5]  a level at which they were before the BOE post referendum  measures came into force.

With US rates going up to 1.25% [6] recently, it seems sensible to at least be considering undoing what at the time seemed a temporary cut to .25% in the UK.

However having seen the pound rally on the expectation of a rate rise, The unreliable boy friend, Mark Carney himself announced that in his view now was not yet the time to increase rates [7]. Which does lead one to wonder if the bank really is independent or if Mr Carney has some influence, clearly he has enough influence to move the pound.

But in a final twist for now at least, Mr Carney’s statement seemed to be contradicted by the BOE chief economist, Andy Haldane, who questioned whether the economy still need the emergency ultra low rates [8]. He went on to suggest that he has not voted for a rate rise yet, was because of uncertainty caused by the general election.

With the vote at 5:3, Mr Haldanes vote would move the committee to a dead heat, but of course with Carney having the tie breaking vote. But with inflation significantly over the boe 2% target, and rising to 2.7% this month, it is surely not long before rates move back to 0.5%.

There may be a little relief, in that further investigation shows that one of the three votes for a rise, Kristin Forbes is due to be replaced by Silvana Tenreyro, at the end of the month [10]. So will this change make any difference ? Surely if the MPC is an independent body it is made up of a blend of hawks and doves. So it follows that this balance should be maintained, so if the dove leaves, then logically that person should be replaced by a person of similar disposition. However, "Economists reckon she’s less likely to vote for an interest rate rise than her predecessor, Kristin Forbes (one of three MPC members who wanted to raise borrowing costs this week)". [11]

This does start to look like interference in the operation of the MPC, perhaps for political ends. So what are we to deduce from all this ? Well the tide has definitely turned, the 5-3 vote, was the most votes for an increase since the financial crisis. Now even allowing for Kristin Forbes being replaced by Silvana Tenreyro and changing the vote to 6-2, we have the chief economist warning about increases, indeed suggesting he will be voting for them before the end of the year.

However much Mark Carney might want to make it look further away, to maintain confidence, surely it’s coming ? The wild card here is brexit. How will the uncertainty regarding the brexit process effect confidence and the market. There will undoubtly be ups and downs “bumps in the road” on the process to leaving the EU.

Whatever the timescale, whether later this year or sometime next year, interest rates will go up, there are a large number of very low mortgage rates at the moment some fixed for upto 5 years. These rates are unlikely to be availble if the outlook for interest rates turns more Hawkish. Now would seem an opportune time to consider your mortgage situation. Are you tied in to a deal ? is it worth considering a long term fix or capped deal ? If you are interested in speaking to a professional Mortgage Adviser regarding your situation, visit our mortgage advice page and fill in the form. A professional adviser will contact you promptly by phone and talk you through which options are best suited to your particular situation.

STOP PRESS, just as we publish this article, the unrealible boyfriend, gave his clearest signal yet that an interest rate rise could be on the way [12], sending the pound to over $1.30. It does beg the question what is going on. Is the Governor of the Bank of England, trying to have it both ways ? Is he trying to keep confidence up by talking down rate rises, and push the pound up to suppress inflation, by signaling possible rate rises ? It is clearly a difficult situation, as the press and financial markets hang on your every word. Could it be that having been more dovish recently, but having discussed further with the MPC, he has now changed his mind ?

Whatever the truth, perhaps now is a good time to review mortgage deals, with a view to considering fixing for an extended period. We have a deal with mortgage brokers who are happy to review your situtation and give advice as to what is best for you, whether you are looking to remortgage, or you are looking to equity release or right to buy.

Do you agree? what is your view on the future of rates, the circus that is the MPC, and is now a good time to buy property or fix rates ? comments welcome on our facebook page >>

1 ] MP likens Bank of England to 'unreliable boyfriend'

[2] Brown gives Bank independence to set interest rates

[3] The Monetary Policy Comittee

[4] Bank of England cuts interest rates to 0.25% and expands QE

[5] Pound jumps after three Bank of England officials support rate rise, as FTSE 250 suffers worst day in 11 months

[6] Graph showing Fed interest rates

[7] Mark Carney says time not right for interest rate rise

[8] Bank of England chief economist poised to vote for interest rate hike this year

[9] ONS Inflation for May 2017

[10] Silvana Tenreyro appointed to Monetary Policy Committee

[11] Guardian views of new MPC member

[12] The Bank of England Governor gave his clearest signal yet that an interest rate rise could be on the way