On Thursday (15 December), it was the UK’s final central bank meeting of the year. As it was expected, the Bank of England (BoE) left interest rates unchanged, at a record low of 0.25%. With inflation rising to 1.2% in November, employment falling for the first time since the Brexit vote and the weak pound driving import prices up, the Bank has to maneuver dexterously and carefully. This is particularly crucial, since, as the governor of the BoE Mark Carney warned earlier this month, the UK economy is suffering its “first lost decade since the 1860s,” and people are feeling that they have lost any control of their future.
The bank’s monetary policy committee voted unanimously to keep rates unchanged and continue with the current programme of Quantitative Easing (QE). This means that it will continue to buy and hold £435bn of UK sovereign debt and £10bn of corporate debt. In August, after the EU referendum and in order to boost confidence, the Bank had cut interest rates and expanded its QE.
The monetary policy committee warned that, in 2017, higher inflation and a slower growth of wages will have a negative impact on household budgets and spending.
But, for now policymakers aren’t changing their strategy: “A slowdown in growth remained likely, but there had been little news since the time of the November inflation report about domestic activity and, although the near-term global outlook had improved, this was counterbalanced by more elevated risks.”
The Pound fell sharply after the BoE’s decision and revision of inflation forecasts. The minutes also underlined a decline in consumer confidence and of businesses feeling nervous in the long run.
For some analysts, the BoE’s decision was good news. Nick Dixon, Investment Director at Aegon said: “With inflation moving towards the Bank’s 2% target quicker than expected, the only way is up for interest rates in 2017. Base rate hikes will be the tool of choice for the monetary policy committee to keep prices in check. Mortgage holders should consult their advisers now about fixing their rates before they rise.”
But others, saw the BoE’s decision as indicative of the foreseeable future: that the policy will remain unchanged, unless there is further slowdown of the economy which might elicit another interest rate cut. Ian Kernohan, economist at Royal London Asset Management, said: “In my view, the balance of probability still favours another small rate reduction next year, and with the Fed hiking rates, this will continue to put downward pressure on sterling against the dollar.”
Chilling con Carney
Christmas is close, and Carney might be finally able to chill. But maybe not quite yet. At least he has done his best to keep British economy afloat, and has given the UK the best possible advice:
“Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations. It has averted depression and helped advanced economies live to fight another day, so that measures to restore vitality can be taken.”
Carney and the BoE have kept the patient alive, now the UK government needs to cultivate those conditions which will help him survive and flourish.
Earlier in December, during a lecture that he gave to Liverpool Moores University, Carney eloquently addressed global inequality and the massive divide between “the superstar and lucky” and those who feel increasingly isolated, insecure and frustrated with global trade and technology. People who voted for Brexit were driven by concerns relating to sovereignty, economy and losing control or trust in the system. They deserved, he said, the honest opinion of economists on issues of globalisation and automation of jobs. A response that was directed to some of Carney’s critics on the Brexiteer camp.
He recognised that globalisation “rather than a new golden era…is associated with low wages, insecure employment, stateless corporations and striking inequalities.” This combined with the way banks have been operating according to the logic of “heads-I-win-tails-you-lose bubble,” has made the public feel threatened by open markets. But “turning our backs on open markets would be a tragedy, but it is a possibility. It can only be averted by confronting the underlying reasons for this risk upfront.” Carney, repeated his answer to Theresa May’s October criticisms about the side effects of the Bank’s monetary policy. He said that the Bank can’t “be held accountable for rising inequality.”
Instead, Carney has repeatedly urged the government to get involved and support the Bank’s attempts to boost the economy. The most potentially helpful way to relieve the feeling of dissatisfaction and disillusionment was to be found “outside the Bank’s remit,” Carney said. Returning to his words, after Thursday’s monetary policy committee, might be useful for the government to revise its own policies and budgets. But it’s easier said than done.
Carney had also said that, while economists “must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology,” in order to “grow our economy” we need to rebalance “the mix of monetary policy, fiscal policy and structural reforms.” And most importantly, Carney advised the government to distribute wealth so that everyone “has a stake in globalisation.”
Carney’s advice is invaluable and thoughtful, and perhaps Theresa May could take a few lessons from him. Otherwise, we might end up like Prince Charles in last week’s picture where he is seen admiring the BoE’s Christmas tree, gazing upwards in eager anticipation of glimpsing some divine illumination.