Bank of England Governor Mark Carney yesterday compared the recovery of the UK economy to “making it through the qualifying rounds of the world cup”, highlighting the need for perspective on the recovery and the understanding that there is still a long way to go. Indeed, there are many more hurdles that need to be overcome for both UK PLC and the England national football team, though many people might feel slightly uncomfortable with the idea of talking about their respective chances of success in the same breath.
The comparison came in a speech after the BoE published its Quarterly Inflation Report (QIR) on Wednesday morning where Mark Carney seemed to put a cork in speculation about a rise in interest rates. He argued that the goal for the economy was to achieve “a strong, sustained and balanced expansion” and that the bank will consider how much spare capacity there is left in the economy before making a decision on raising interest rates.
For the Conservative party one of the biggest campaign issues for the next election will be the economy and their policies which many would argue have been leading the recovery. The possibility of an imminent change in monetary policy before the general election next may is therefore a big deal for the Tories, who will not want to pay the price for the Monetary Policy Committee’s decisions on polling day. Mark Carney has however reassured worriers inside the government and out somewhat by saying that an interest rate rise would only be a last line of defense for managing the housing market and that any rise would be very gradual. City traders have now pushed their estimated date of rate rise to April 2015 which may spell trouble, though it is also true that interest rate effects lag. We think in this case the effect economically, and politically could be sudden; given the years of cheap money that the clearing banks have been able to borrow at an interest rate shift will have a more seismic effect than in previous years.
Moreover, if this happens the coalition, Chancellor Osborne in particular, will perhaps regret his dependence on the MPC and quantitative easing as a macro-economic instrument. Whilst the economy grows it is likely that the tories will rise in the polls. That momentum may not be perpetual.
He was formerly Head of Policy at the Society of Trust and Estate Practitioners (STEP). With degrees in history and economics from the Universities of Oxford and London, Jake is a Fellow of the Royal Society of Arts, a trustee of the European Association of Philanthropy and Giving and advises several governments on public policy. He also advises clients on CSR and philanthropy activities.
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