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  1. Wealth
June 22, 2017

Carney’s right: it’s too soon to raise rates

By Alec Marsh

News that Bank of England chief economist Andy Haldane is breaking ranks from his boss Mark Carney and backing an interest rate rise ‘relatively soon’ could not come at a worse time, writes Alec Marsh

The decision by Andy Haldane, the chief economist of the Bank of England, to break ranks from his boss Bank governor Mark Carney and call for an interest rate rise ‘relatively soon’, could not come at a less propitious moment.

Just days after negotiations over our Brexit departure have begun, there is uncertainly aplenty already about the future of UK plc. Now is not the time to start increasing borrowing costs for businesses or reducing their competitiveness in the eyes of foreign buyers. Our exporters and service industries are enjoying the fillip offered by sterling’s Brexit dip – let’s not ruin it.

That inflation reached 2.9 per cent in May, up from 2.7 per cent in April and the highest in four years is naturally worrying. But we are far from being in a position where you must starting pushing a wheelbarrow along to do the weekly shop at Waitrose.

The moderate increase in inflation must be weighed against the massive uncertainty surrounding Brexit, and its impact on business sentiment. It must be balanced against the recognition that now is not the time to undo the low interest environment in which Britain’s tardy post 2008-crash recovery was finally and successfully birthed. Nor should our policy makers forget that most Britons are still no better off in real terms than they were 2008. So there is a strong public good in permitting a slight rise.

Finally, we have to remember that the recent rise in inflation was import-led, fuelled by the very fall-back in sterling and the rise in import costs caused by the Brexit vote. While, of course, a rate rise might ameliorate this inflation, it might also upset the economic fundamentals supporting it.

It is the still massively-leveraged consumer and householder of Britain that must be protected: as must business as it seeks to invest and expand. Moreover it is simply a fantasy to believe that after of several years of growth that the UK economy is somehow about to overheat. More heat would surely be a good thing. This is not the moment to upset the apple-cart of Britain’s benign interest rate environment, nor the moment to turn off the taps on the faltering recovery. Carney is right, ‘Now is not yet time’ to raise rates.

We will find out how the change of heart by Haldane, previously an interest rate dove, plays out at the next meeting of the Bank’s monetary policy committee on August 3. However, the maths of the balance of the committee would appear to be against him.

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As is, perhaps, the tide of opinion, with central bankers like the Fed’s Janet Yellen questioning whether it’s now right to consider raising inflation targets altogether. And that’s spot on, growth, not inflation ought to be our immediate priority and the signs are there is still plenty of opportunity for that left in UK plc before rates need to rise.

Alec Marsh is editor of Spear’s

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