“Super Thursday” didn’t quite live up to the grand billing. The moment of the first hike in interest rates is getting closer, said the Bank of England governor, Mark Carney, but it is also clear that this song could remain the same for some time. Only one member of the monetary policy committee, not the expected two, voted for a rate hike. It is now highly unlikely that interest rates will rise this year.
Despite Carney’s many references to “robust momentum” in the economy, next May is viewed by financial markets as the most likely moment the Bank increases the cost of borrowing. The mildly dovish message was echoed in the currency markets: the pound fell 0.75%.
Three factors explain the still-strong vote for unchanged rates at Threadneedle Street. First, the Bank can be less robustly confident that 0% inflation is a temporary phenomenon that will disappear quickly. Commodity prices are still falling and energy suppliers’ price cuts will still be feeding into the data until the middle of next year. The MPC expects inflation to remain close to zero for at least the next few months.
It’s the job of the MPC to look beyond “one-off” effects in the inflation data and identify underlying trends but the key line in the minutes was this: “It appeared that the increase in inflation over the following year would be more gradual than had previously been supposed.”
Second, the pound is 3.5% stronger than it was in May, applying a slight brake on the economy, at least the part targeted at exports. Carney argued that growth in the private sector is strong and that there’s a need to increase interest rates “at some point”, but he also conceded: “There’s no doubt the strength of sterling is having an effect on policy.”
The third factor is trickiest for the Bank: the mixed message in the labour market. On one hand, wages are finally growing reasonably strongly – weekly earnings were 3.2% higher than a year earlier, according to the latest statistics. Yet employment fell by around 67,000 in the three months to May, defying expectations and supporting the case of doves who argue that the recovery remains fundamentally fragile.
The Bank’s official view is that the last employment figures were probably a blip in an encouraging three-year trend. It still regards the labour market as tightening, as seen in the slight pick-up in productivity. The data is always volatile, said Ben Broadbent, the deputy governor. Yet another weak jobs report would put the cat among the pigeons. It’s another reason to wait and see, especially as the Bank spectacularly failed to predict the sharp improvement in employment from mid-2013.
The other question here is whether the slew of simultaneous-released documents – a rate decision, the supporting minutes, and a quarterly inflation report – actually improves the market’s understanding. That, after all, is meant to be the point of Super Thursday – less noise, and less confusing signals. A proper judgment is impossible on day one. But one can’t say on Thursday that the new era of greater transparency has aided understanding. We still have a Bank governor who sounds increasingly hawkish on rates – but lacks a cast-iron case for moving soon.
The timing of the decision on when to move rates will move into “sharper relief” around the turn of the year, Carney repeated on Thursday. Well, it might. But it’s also possible that the real world – a blow-up in Greece, a steeper slowdown in China or more wobbly unemployment data – intervenes.
