The decision to hold rates was widely expected. The economy is showing signs of recovery, confirmed by recent data including our own QES survey and the important GM composite indicator. It is too early to begin the programme of base rates rises but it is time to say goodbye to QE as a policy option.
Commenting on today's Monetary Policy Committee (MPC) interest rate decision, as Chief Economist at the Greater Manchester Chamber of Commerce.
The sooner long term gilt rates return to some semblance of normality the better. The August meeting should be more interesting to rate watchers. Markets are looking for a statement on forward guidance and the future path of interest rates.
Mark Carney must be careful not to make the same mistakes as Bernanke. Forward guidance increases market volatility with an unhealthy focus on the US non farm payroll data. The markets can no more ignore a speech delivered by Bernanke, than Chinese banks can ignore a directive from the People’s Bank of China. The new Governor must avoid becoming hostage to a monthly data set.
What can the markets tell us about the future direction of interest rates? Not much if we look at the projections over the last few years.
In the Inflation Report (May) the Bank of England suggested markets were not expecting base rates to rise until the middle of 2016. Why should the MPC worry if markets think rates may rise in 2015? The analysis of expectations over the last four year has not proven to be much of a guide as the Chart of the Day indicates.
The Saturday Economist
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