New “Natural” Base Rate for the UK could be 3% or less

Over the last few weeks there has been a steady string of press releases by individual members of the Bank of England’s Monetary Policy Committee (MPC) commenting with their own thoughts of how Base Rate may rise when and to what point.

I think it is safe to assume that this has been choreographed by the Bank of England to help manage public and press expectations on future interest rates. What is becoming apparent is that the MPC are now of the opinion that even when the economy has recovered and is performing well the natural base rate will be more like 2.5 to 3% rather than the more historic 5% of the past 20-30 years.

Now Mark Carney, the governor of the Bank of England has come out with his own opinion that interest rates could (not will) hit 3% by some point in 2017. Latest opinion using the MPC’s own figures is that we are unlikely to see a rise before 2015 and that any increases would be small and gradual eg. 0.25% at a time.

During a Treasury Select Committee hearing yesterday MPs accused “Forward Guidance” of being dead and buried after unemployment fell below 7% unexpectedly. Conservative MP Brooks Newmark also quipped unhelpfully that it more resembled “fuzzy guidance”.

Mark Carney responded by saying, “we provided guidance that was well understood. Businesses indicated it gave them greater confidence in the recovery and influenced hiring and spending decisions, contributing to falling unemployment.”

“These 18 indicators are not part of the new forward guidance. They are the fulfillment of a commitment the Bank made to implement recommendations to improve transparency and forecasting. We have provided more detail about our forecasts and it allows greater perspective.”

“Interest rates will rise on a gradual and limited extent. Some Monetary Policy Committee members have put more precise figures on when interest rates will rise over the three year horizon. Charlie Bean said an increase of 2 per cent to 2.5 per cent and I don’t think that is an unreasonable sense to get across.”

Separate to considerations of future interest rates Andrew Tyrie, the chairman of The Treasury Select Committee, criticised the Bank of England for destroying MPC meeting notes as showing a lack of transparency and record keeping for historic economic decision making.

However Paul Fisher the deputy Bank Governor made the point that retaining word for word records would likely make any discussions less open and frank leading to a lower quality debate of what should happen.

I am very much inclined to agree as this has never been an exact science and we need strong opinion to be heard and debated for the good of the UK economy not stifled politically correct pandering to politicians and the press who generally do not understand or deliberately miss-interpret for a good story or political gain.

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