Low interest rates for the future, but mind the caveats.
Yesterday we saw the new Bank of England governor make his much anticipated first major comments since taking the reins at Threadneedle Street. What we leant – things are changing, well sort of but actually they’ll probably remain the same.
The major headline ‘bank won’t raise rates until unemployment is 7%’ may give the press hope that we can see 3 years of stability, low borrowing, and a booming housing market but in practice nothing is quite as it seems.
The primary role of the MPC is to control inflation at the government’s 2% target. To protect the primacy of this target there are 3 ‘kick-outs’
· Should 2 year inflation forecasts be 0.5% higher than the Banks target
· The Banks fiscal policy committee determines the stance poses a threat to stability
· Inflation looks like it could get out of control in the medium term
Should any of these situations arise then all bets are off, and the possibility of a rate rise returns.
The battle between growth and inflation isn’t going to go away even with Mr Carneys’ forward guidance policies, which means the battle over interest rates isn’t going to change any time soon – while savers continue to be stung with negative real returns, home owners are able to take advantage of extremely cheap credit. You can’t keep both parties happy while supporting the economy, promoting QE and bowing to political pressure.
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