Record-low savings rates and rising inflation have not yet persuaded the Bank of England (BoE) to hike interest rates – and after three members of the eight-strong Monetary Policy Committee voted for such a move in June, the doves look to be back in control. Indeed, today’s consumer price index data – which remained steady at an annual rate 2.6%, contrary to expectations for an increase – indicate they are increasingly winning the argument.
The BoE’s emergency package of stimulus measures, delivered in August last year – when credit was already growing at a healthy pace – propelled a potentially destabilising explosion in consumer credit seen over the last year. However, surprisingly to some, in its August meeting the central bank dismissed concerns over worsening credit metrics, putting the risks ‘down to a small percentage of borrowers.’ What’s more, the BoE has been consistent in arguing that it doesn’t see domestic inflationary pressures as being an issue.
In doing so, the monetary guardian is essentially doubling down on its ‘distributional’ policy of low interest rates and weaker sterling to support jobs, investment and trade at the expense of falling real incomes. The failure of UK exports to pick up adds to the argument for a weaker currency, although if we are to see a ‘J curve’ effect, trade figures initially worsen before improving on currency weakness.
The pound has borne the brunt of the impact of the Brexit vote – and the central bank is pushing for more, hoping a weaker sterling will ease the economic decline. This strategy is not without risk, as any monetarist will tell you: with the credit taps firmly on, there is a good chance domestic inflation will rise. However, with each weak economic data point, the BoE’s gamble appears to be the right one, and given the growing divergence between the UK and the eurozone, an even weaker pound is looking increasingly certain, in our view.