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A false step by the Bank of England. There is no compelling reason for higher interest rates...

FINANCIAL TIMES – Leader 3 August 2018...


The Bank of England's confidence in the long-run neutral level of interest rates is unwarranted given the uncertainties. Thursday’s increase in interest rates by the Bank of England was almost entirely anticipated by the financial markets. The vote on the bank’s Monetary Policy Committee was also unanimous. It was the wrong move nonetheless. Careful and consistent signalling ahead of the meeting meant that, when the BoE raised rates for only the second time since 2009, investors were well prepared. Sterling rose and fell somewhat, but the moves were not dramatic. But a bad decision is a bad decision, no matter how well spun. The fact remains that, despite year after year of overestimating likely inflationary pressure, the BoE hiked in the expectation rather than the reality of notably faster rises in wages and prices. It has a degree of confidence in its guesses of potential output and the long-run neutral level of interest rates that is unwarranted given the uncertainties that surround such estimates. The decision had all the hallmarks of a committee that has decided that it will only be comfortable when rates are at a higher level that feels more natural. And it appears to have decided to seize on every piece of evidence as justification to put them there. Yet it is far better for central banks to be more clearly and dispassionately guided by the data. Meeting earlier this week, the Bank of Japan rightly said it would maintain interest rates at extremely low levels for an extended period, although it slightly tweaked its bond market intervention programme. The Federal Reserve, which also met this week, is closer to the BoE’s approach in looking for reasons to raise borrowing costs, though the US economy has shown more signs of inflationary pressure that justify tighter policy. There is no compelling reason to increase the cost of borrowing in the UK, but there is definitely good cause to wait. As Mark Carney, the bank’s governor, acknowledged on Thursday, Brexit — and the uncertainty preceding it — is an idiosyncratic shock to business and consumer confidence. The size of that shock is unknowable, but it is almost certainly negative. Adding higher rates to the mix will only make companies and households more vulnerable when it arrives. Brexit day, in March next year, is now less than eight months away: it would not have hurt to hold off tightening until the near future becomes a little clearer. It would not be at all surprising if this hike turns out at the least to be premature and at the worst to be self-defeating, weakening the very growth on the expectation of which it was predicated. When the BoE increased rates by a quarter-point last November, it could at least be argued that it was cashing in the insurance it had taken out when it eased immediately following the result of the Brexit referendum. There is no such justification this time.