The Bank of England would really really really really really really like to raise Bank Rate

Yesterday afternoon saw quite a ramping up of the Forward Guidance rhetoric from the Bank of England and in particular it saw yet more promises of Bank Rate rises. Governor Mark Carney fired the opening salvo. From the BBC.

The point at which interest rates may begin to rise is moving closer

Although as ever it came with a counterpoint that the move should it ever come would be small.

Once rates begin to adjust, we expect for those adjustments to be at a gradual pace and to a limited extent.

This mantra has become rather familiar from Governor Carney as we note that Forward Guidance has become a contradiction in terms. What I mean by that is that back in June 2014 in his Mansion House speech he stated that Bank Rate “might rise sooner than markets expect” and of course it is now July 2015 without it happening. Indeed as no MPC (Monetary Policy Committee) members are currently voting for a rise you can argue we have moved further away as previously two did.

Another front was opened in this campaign by David Miles in a speech given to the

It also comes at a time when I think the case for beginning a gradual normalisation in the stance of monetary policy is stronger than at any time since I joined the committee over 6 years ago.

I think a first move up in Bank Rate soon is likely to be right.

The time to start normalisation is soon; that is not something to shrink from.

He also gave us a suggestion as to how much they might rise.

That would give one a range for nominal r* at the start of 2018 of between about 2.5% and a bit above 3%.

That is a bit higher than some other suggestions although now we hit a problem you see whilst David may share a surname with part of a song by the Who concerning prescience he has shown the reverse.

I can see for miles,and miles and miles

Instead David Miles voted for extra Quantitative Easing just as the UK began its current growth spurt in an example of adding to the punchbowl as the party gets going. Also his importance declines as the end of his term nears as it is easy to promise interest-rate rises for others! I do hope that this is not a way of redacting and modifying his record which is one of 6 years of unchanged interest-rates.

Oh and never believe anything until it is officially denied!

One thing the MPC will not do (and never has) is just follow another big central bank; it is a daft idea that we cannot raise rates in the UK before the US and also cannot be long be.

So “daft idea” goes into my financial lexicon for these times as I and I believe many others consider that there is a lot of truth in it.

UK Wages

My first thought on hearing the Mark Carney rhetoric was that he already knew today’s wage numbers ( he gets them at 9:30 am the day before). So let us see if they backed him up.

Comparing March to May 2015 with a year earlier, pay for employees in Great Britain increased by 3.2% including bonuses and by 2.8% excluding bonuses.

As you can see there is a welcome improvement which also translated into a considerable improvement for real wages too.

Comparing the three months to May 2015 with the same period in 2014, real AWE (total pay) grew by 3.2 per cent, the highest rate of increase since July to September 2007 when it rose by 3.3 per cent.

So this is the best performance in real wage terms in the credit crunch era in quarterly terms.

The single month of May was also good if not quite so strong. Total wages grew by 2.6% and we know that CPI inflation was 0.1% so we had real wage growth of ~2.5% in May. So also strong albeit on a single month basis there is a sign of a dip.


Today’s data had a hint of an improvement here too as shown below.

Total hours worked fell 0.2% in Mar-May, as employment fell. NIESR says GDP rose 0.6%. Implies productivity is finally rising. ( H/T Chris Dillow )

Some Perspective On Real Wages

Lest we get carried away on the real wage front there was an interesting number on the subject in the David Miles speech.

real wages are probably around 20% below that trend. ( he means pre credit crunch trend).

We have a new official series for this published today and if we set the benchmark at the beginning of this century or the year 2000 at 100 we saw for a while happy days as the index rose to 118.1 pre credit crunch. But in spite of the recent improvement we are now at a relatively measly and lower 111.5. Not much growth for 15 years is it?! Hence the issues over the cost of living.

Another factor which can be added to this is that even such a poor result has been flattered by the use of the official inflation measure in the UK the CPI or Consumers Price Index. It was only yesterday I was pointing out the gap between it and the RPI or Retail Price Index. So real wages growth is currently 1% lower if you use that measure. Also the total real wage growth number will be weaker.

What about employment and unemployment?

For the first time in a while the UK has seen a reversal on this front.

Comparing March to May 2015 with the 3 months to February 2015, the number of people in employment fell by 67,000 (to reach 30.98 million), the number of unemployed people increased by 15,000 (to reach 1.85 million).

I had already mentioned in passing the fall in hours worked.

Total hours worked per week were 995.6 million for March to May 2015. This was:• 2.3 million (0.2%) fewer than for the 3 months to February 2015 (the first quarterly fall since February to April 2013).

They are still up on a year ago (0.8%) but we have seen a more recent retracement.

If we move to the single month estimates for May we get a confusing picture. Firstly we see a rise in unemployment.

The single month estimate for May 2015 shows an increase of 0.1 percentage points on the previous month.

But we also see a pick-up in employment!

The single month estimate for May 2015 shows an increase 0.3 percentage points on the previous month.

As the soap called Soap put it ” Confused? You soon will be!”


There is much to consider here with the Bank of England yet again ramping up the mood music on a Bank Rate rise. This gets an initial confirmation from the quarterly wage growth data although this fades a little if we look at the latest month of May. But then we face the issue of them potentially raising Bank Rate into an unemployment rate rise! I suspect we remain in an era of,  with apologies to Carly Rae Jepson to ” We (would) really really really really really really like to raise Bank Rate” but what with rising unemployment we cannot. Or as it was put in the comments section yesterday FG stands for Forward Gullibility.

If we move to an external perspective then we see also a phase where the UK Pound has been strong. Yesterday the effective exchange rate was 93.28 compared to the low of 77.9 in March 2013. Putting that another way it can be considered equivalent to just under a 4% increase in Bank Rate over this period. It of course impacts on different economic sectors and welcome in a way to British economic history!

Looking internationally the Swedish Riksbank has published its monthly meeting minutes today and it has a similar situation to us.

GDP is expected to grow more rapidly than normal in the years ahead and the labour market continues to improve.

Yet they cut by 0.1% to -0.35%. Can we raise Bank Rate in such an environment? I worry about that and I am someone who would like it higher to help rebalance our economy. Back in 2010 when I argued for this an opportunity was badly missed.

UK and Greece

The UK runs the risk of being dragged into the Greek bailout via the bridge financing required. As Euro area mechanisms have the turning circle of a supertanker eyes have turned to the European Union emergency fund called the EFSM. From Peter Spiegel of the Financial Times.

I’m told details of plan to use -wide EFSM for bridge funds will be presented by at midday presser.

However the scale of use does have a limit because of the 60 billion Euros potentially available only around 13 billion currently are as the rest was deployed in Ireland and Portugal.

Supposedly this had all been ruled out in 2011 as after all we and the other non Euro nations have had nothing to do with the bailout terms and negotiations. What could go wrong with a deal that nobody actually seems to believe in?


18 thoughts on “The Bank of England would really really really really really really like to raise Bank Rate

  1. Shaun,
    New graduates looking for work could explain increases in employment & unemployment?
    Are employers reluctant to recruit with living wage plus pension changes on the horizon whilst exchange rate makes life difficult for marginal companies?
    Latest IMF actions seem to be counterproductive in continuing Euro saga!

    • Hi Chris

      Yes that could be a factor as although the numbers are seasonally adjusted the ONS does refer to a similar influence.

      ” for example school leavers entering the labour market in July and
      whether Easter falls in March or April. ”

      The exchange rate effect is on my mind today as I watch the UK Pound £ pushing into the 1.42s versus the Euro.

      As to the IMF is it not revealing that telling a least some of the truth looks counter-productive?!

    • I disagree , wages are linked to population and thats linked to landprices and houses

      more people means less wages ( in general ) and more demand for housing/land for which there is finite availabilty ( even if you abolish all planning what so ever )

      people are a problem


  2. Hi Shaun,
    I am interested in the figures you quote for real wage growth, increasing from 100 at the start of 2000 to 111.5 currently, based on CPI inflation. You rightly make the point that a worse picture would emerge if a comparison with RPI is made.
    To support this, it is interesting to look at the figures for CPI and RPI over this period. CPI All Items has increased by about 39% and RPI All Items by 55%. This seems to confirm the view that there is a typical 1% difference per annum.
    It doesn’t take much maths to show that the real wage growth since 2000 relative to RPI is approximately ZERO.
    Maybe that’s no surprise!

  3. “The point at which interest rates may begin to rise is moving closer”.
    The point at which the sun collapses in on itself is also moving closer. So is everything else that will happen at some point in the future… I cant belive he gets paid for uttering this crap!

    • Hi Tim

      The one thing that did move closer this week was the New Horizons sateliite and Pluto but unlike Governor Carney’s “closer” we got something tangible out of it! Indeed some of it was stunning.

      The current central banking mantra is to promise interest-rate rises in the future and on cue Janet Yellen of the US Federal Reserve did the same in her testimony to Congress earlier.

      ” If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.”

      It is the doing it part of it where we find no action.

  4. Hi Shaun

    Your obvious scepticism re a rate rise reflects my own; I simply do not see it happening. We have too much debt, the stock of which is getting bigger by the day (both public and private), and almost any increase in rates is going to bring whatever growth we have to a shuddering halt and TPTB know this full well; it is pretty obvious after all.

    I do wonder if people like the BOE do in fact realise that some of the economic statistics are in fact misleading in the way you suggest, because of course if this is the case, they cannot come out and say: “we won’t increase rates because we don’t believe the statistics; things are in fact worse than they seem” they have to invent the sort of specious BS we get served up every month now.

    The CBs are in a corner; they have reduced rates and this has encouraged bubbles and they cannot increase rates without pricking the bubbles and the bubbles is really all we have.

    Also as RobinB says above if you use RPI instead of CPI real wages have stagnated for the last 15 years. This mirrors the US where median wages have stagnated for in fact the last 40 years (since the early 70s). All this crowing is singularly misplaced.

    • Hi Bob J

      A lot of my scepticism comes from the level of the UK Pound £. I noted its strength in the article above and it has pushed firmly above 1.42 versus the Euro today. There is a danger that Mark Carney and the cronies do not fully realise its impact on the UK but it is a monetary brake.

      As to the Bank of England and RPI it was interesting that as well as the FT posse which tried to chase me on Twitter yesterday there were also some ex Bank of England economists. So it would appear that at least in terms of ex-economists it is out of favour and by that I mean for everyone else as apparently it was good enough for their pension scheme.

  5. Hello Shaun,

    isnt he just copying the USA ? did they mention a rate rise ?

    Frankly its all noise isnt it?

    talk the market up , thats all


    • Hi Forbin

      Actually the tail seemed to be wagging the dog today in terms of timing as Janet Yellen trailed Mark Carney.

      ” If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.”

      Of course it was probably just a fluke of timing of the parliamentary testimonies.

      They may even believe that people are silly enough to make decisions based on their promises…..

  6. Hi Shaun,

    The IMF may be attacking the debt sustainability provided someone else pays for debt relief, but they still fail to mention “default and devaluation”. Vested interests ? National Interests of top staff ?

    Steve Hanke has suggested copying Bulgaria’s currency board.

    And I rate his opinion highly due to the proven success of the currency board he helped to create.

    • Hi ExpatInBG

      I take your point about and experience of the currency board but the Lev is fixed to the Euro isn’t it? So Greece would have to float as in fall for a bit in Drachma terms and then have a fixed (but lower) exchange rate again. The danger of going back into a type of Euro fix is that whilst it would be at a more competitive level would Greece be back in the same troubles after a decade or so?

      • 1 Lev = 1 DMark, now 1.953 BGN = 1.0 EUR

        The Bulgarian currency board has Euro reserves equal to the Leva in circulation – as a clause. No politician dares to alter this, it would be electoral suicide. It’s common wisdom that the currency board rules and their imposition on politicians is the only thing standing between the current happy monetary stability or inflationary lunacy, collapsing currency and collapsing living standards.

        Hanke makes a point about moral hazard – anything Greece adopts needs to definitively make borrowing / printing solely a Greek problem.

  7. Great column, Shaun, as per usual. Regarding when Mark Carney might raise the bank rate, the first time he ever raised a bank rate as a central bank governor was in June 2010, as Governor of the Bank of Canada, when he hiked the overnight rate from ¼% to ½%. Today, his successor, Stephen Poloz chose to lower the overnight rate from ¾% to ½%, so after a pair of cuts, it is back to where it was five years ago. The Bank of Canada’s operational guide, core CPI as measured by CPIX, the CPI excluding eight volatile items and changes in indirect taxes, has been above the 2% target since August, a run that is virtually certain to continue with the release of the June update on Friday. The response of the Bank has been that the underlying rate of inflation is actually between 1.5% and 1.7%. Since Governor Poloz took office, the Bank has started publishing something called a common component of CPI measure, which purports to show this. Having failed to keep core inflation down, it seems our central bank is determined to define it down.
    I’m sure this announcement won’t have any direct impact on what the Bank of England does with the bank rate, but it might have some indirect impact, as I suspect the US Fed officials will take note of it and any doubts they have about raising interest rates in September will be reinforced.

    • Hi Andrew

      I had noted the Bank of Canada move and people were waiting for it and indeed expecting it over here. I wonder what Mark Carney thinks about it?

      Looking for new “improved” inflation measures is a feature of these times.

      As to impact obviously it is greater on the US than the UK but there are other impacts. For example interest-rate cuts in 2015 head towards 60 whilst voluntary interest-rate increases seem to get stuck at the promises stage. Also if we look at the impact on the UK whilst the impact of the Loonie on the trade-weighted measure is low it is there and it is one more currency for us to rise against. It feels like quite a while since we have been above 2 Loonies per £.

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