Cascade Commentary

Bank of England needs to raise interest rates, says committee member Michael Saunders

The Bank of England has been urged to increase interest rates to offset rising inflation by external committee member Michael Saunders in a speech made in Cardiff on Thursday. Mr Saunders acknowledged that a sharp increase in interest rates could be detrimental to the UK economy, but explained that economic indicators support the view that banks, companies and consumers are well positioned to withstand a slight upward move in bank rate. 

In early August, Mr Saunders and fellow committee member Ian McCafferty voted for an interest rate rise but the remaining six members, including the recently appointed Silvana Tenreyro, voted to leave interest rates unchanged, detailing the ongoing trade-off between the tightening of monetary policy to restrain inflation and the support of a loose monetary policy for income growth and higher employment.

However, Mr Saunders drew on recent data released by the Office for National Statistics (ONS) that showed earnings growth in the three months to June was 2.1% higher than twelve months earlier, with the jobless rate falling to a 42 year low at 4.4%. Employment was reported at 32.1 million in the three months to June 2017 representing the highest employment rate at 75.1% since modern records began in 1971. Mr Saunders said that this data has paved for the way for higher shop prices and wage increases.

Furthermore, Mr Saunders argued that while Brexit uncertainties undoubtedly continue to weigh down on household and business confidence, the decreasing number of migrant workers coming to the UK in the aftermath of the June 2016 vote is already adding pressure to wage increases. 

In his speech on Thursday, Mr Saunders cautioned his fellow committee members in their delay for action, indicating instead that it was better for the central bank to take action sooner rather than later in a slow and gradual manner to be able to view and observe the effects in parallel. Any further delay, according to Mr Saunders, would remove the committee's ability to do so where action may alternatively be forced upon them. 

Cascade Commentary

It has been ten years since the Monetary Policy Committee (MPC) increased interest rates. Since that time, much of the regulation governing financial institutions and the market has led to stronger balance sheets with lower debt to income ratios and higher levels of liquidity among companies and households. 

We have indicated in our previous commentaries that a gradual increase in interest rates would be necessary to allow households and businesses to readjust to higher borrowing rates. It must be recognised that while low interest rates are theoretically employed to encourage household spending and corporate investment, they simultaneously increase access to credit with the cost of household mortgages, as an example, at record low levels. Holding most economic indicators constant, an interest rate rise may reduce both household spending and corporate investment which could dampen the UK's economic growth prospects, which is the fear of the majority of committee members at present.

However, it should also be recognised that household spending and corporate investment has already been subdued due to the uncertainty following the vote to leave the European Union and as a result, many households and those in the corporate sector have been retaining more liquidity than usual. Mr Saunders argued today that as a result of this, the economy is in an appropriate state to withstand a slight increase now to start the upward trend and help curb inflation from further rises. The MPC next meets in September 2017, publishing its minutes on Thursday 14th. 

Many savings rates today are failing to deliver a real return and so it is important to ensure that any cash being held is earning the best rates possible within parameters that can help to simultaneously reduce counterparty risk by taking advantage of depositor guarantee schemes such as the Financial Services Compensation Scheme. Should you wish to discuss how the Cascade service can support you in achieving these objectives, do give us a call on 0191 4813777 and we'll be happy to assist.

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