Tuesday 17 July 2018

Tipping point looms for rise in rates says Bank of England member

David Miles, monetary policy committee member at the Bank of England. Photo: Bloomberg
David Miles, monetary policy committee member at the Bank of England. Photo: Bloomberg
Colm Kelpie

Colm Kelpie

The debate over when the Bank of England might hike interest rates is heating up, with one member of the Monetary Policy Committee declaring increases are on the way and will be a reflection of the economy's strength.

Such a move - the first in more than eight years - would likely push the value of sterling up even further, which would be a further boon for Irish exporters. Bank of England policy maker David Miles, inset, said the turning point for borrowing costs is coming "pretty soon".

Inflation data in the UK this week bolstered bets that the BoE will press ahead with plans for an increase possibly in the first quarter of next year.

Mr Miles, who leaves his role on the rate-setting committee at the end of the month, said increases from the current record low of 0.5pc will happen "pretty gradually" and the normal level of rates will be around 2.5pc-3pc.

He also said the first move should be taken as sign that the economy is returning to a "more normal position", rather than anything to worry about.

"What we've seen in the last few years is thankfully a recovery in consumer spending, but not runaway consumer spending," he said.

"People have not been borrowing very much. We've got back to normal growth rates, but I don't think it's on the back of a boom in consumer spending."

John Moclair, head of retail treasury sales at Bank of Ireland, said a rate hike would be a plus for exporters here. "To some extent it's priced in... but I think when it does happen you're likely to see even further strengthening of Sterling, so in that sense, for Irish exporters it will be a positive," he said.

"And if Sterling becomes a bit stronger and the euro is a bit weaker, it might push up inflation a bit in Ireland which may or may not be a bad thing, given there's likely to be some deflationary pressure from China."

Fiona Hayes of Cantor Fitzgerald Ireland agrees.

Predicting a rate hike early next year, she said the recent devalutaion of the yuan has been a gamechanger.

"However, we also think China's actions will dent the efficacy of QE by the ECB - meaning it will possibly have to extend the current programme or enhance it. All this adds up to a weaker EUR-GBP exchange rate despite the fact that it is already at the weakest level since late 2007.

"Obviously this is good news for exporters and the tourism industry."

More pressing again is prospect of interest rates in the US being hiked, amid speculation that such a move could come as soon as next month.

Minutes from the Federal Reserve's July meeting, released yesterday, were expected to give an update on the US central bank's thinking, but came after this supplement went to press.

Q & A

When will the Bank of England increase rates?

Experts predict the first quarter of next year. Bank of England governor Mark Carney has floated the possibility that it could even come in December. But plenty of things could derail that prospect yet, but all the indications are that the bank will press ahead. 

What would the impact of a rate rise be on Sterling?

Many commentators believe a rate rise is already priced in, but in saying that, an increase would likely fuel confidence in Sterling further and boost confidence among international investors about the state of the UK economy. It could look particularly attractive if Eurozone growth remains sluggish.

How would that impact Ireland?

Britain is a major trading partner for Ireland and a vital market for many exporting businesses here. If Sterling is strong, that would be a positive for those businesses because it would be easier to sell their products. It would also be good from a tourism point of view as UK visitors would get more bang for their buck.

Colm Kelpie

Indo Business

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