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Interest rates may rise sooner than expected

If you read all of the commentary about Mark Carney’s Mansion House speech on Friday 13th June 2014 you will almost certainly be left believing that the Governor said that a rise in Bank Rate is imminent.

Indeed, the BBC’s economics editor, Robert Peston, said on Radio 4’s World at One yesterday that he expects an interest rate rise in the next two to three months. But, as has happened before, the commentators have failed to listen to what the Governor actually said and have just given a knee-jerk response in reporting a potentially misleading headline.

Sure, he did say that interest rates could rise sooner than financial markets expect but then spent five minutes qualifying the statement including the following passage:

“At this point it is safest to conclude, as the MPC has, that there remains scope for spare capacity to be used up before policy is tightened and that a host of labour market, capacity utilisation and pricing indicators should be watched closely to determine how that slack is evolving.

Growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected at last year’s Mansion House dinner. So far this has been largely matched by indicators which suggest that there is more supply capacity in the labour market than we had previously thought.

As a result of these two welcome developments, despite rapid jobs growth, pay pressures and unit labour cost growth have remained subdued.

The MPC expects the rate at which slack is being eroded to slow during the second half of this year as output growth eases and productivity growth recovers. But thus far there are few signs of a deceleration in output growth. And a challenge in deciding when to begin normalising policy is that actual output can be observed but potential supply cannot. That is why the MPC is monitoring a broad range of indicators including coincident ones such as the behaviour of wages and prices.”

I believe that the Governor is a canny operator who knew precisely how he was likely to be reported – and the impact that this was likely to have on the markets.

One and two-year swap rates jumped by around 0.2% and whilst there has also been an increase in five-year swaps to the highest rate since mid-2011, the increase here is less pronounced as the longer term expectations have not changed significantly. These increases have caused sterling to strengthen thereby reducing imported inflation and thus helping to sustain non-inflationary growth in the UK economy. Accordingly we do not believe that an increase in Bank Rate is imminent.

However, these changes in swap rates will add further pressure on lenders’ margins with the resultant likelihood that the next re-pricing of their mortgages will be an upwards movement. So maybe the commentators were right – even if their reasoning was wrong!

Anyway we strongly recommend that you consider taking out five year fixed rate mortgages before the inevitable increases come through.

If you would like to discuss any of the above points or have any questions around the matter, please feel free to contact me on my direct dial 01732 471622 or 07712051380

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