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Bank puts its reputation before welfare of British households

Jonathan Samuels Jonathan Samuels
Posted on Aug 03, 2018 | in Blog

And there we have it. On Thursday, the Bank of England's Monetary Policy Committee, led by 'unreliable boyfriend’, Mark Carney, unanimously voted to increase rates by 0.25% to 0.75%.

While bringing inflation down to its 2% target and beginning the process of normalising rates might be the official reason for the hike, the Bank of England's aim is also to deliver a shot across the bows to overly indebted consumers.

There’s certainly some logic in that. After all, UK consumers have taken on a huge amount of debt in recent years and need to be reined in. Collectively, we’re spending more than we earn.

In that sense, Thursday’s rate hike is a symbolic rise more so than a substantive one likely to be closely followed by more. The message is roughly: "You know, this will end at some point".

But in raising rates this week, you can't help but think the Bank of England has put its reputation (of never acting on its forward guidance) before the welfare of the average British household.

After all, while a quarter per cent increase won't take home finances to breaking point, it will add to the pressure at a time when consumer confidence is already low and finances under pressure due to negligible wage growth.

More fundamentally, why raise rates when the economy is so weak? In the three months to May the economy grew by just 0.2%. Rate rises usually come when an economy is firming up, not flimsy.

And it's not exactly that inflation is rampaging out of control. At just 2.4%, inflation is only slightly above target - and considerably lower than it has been in recent years.

Then there's the small matter of Brexit. We are fast approaching the business end of Brexit, which could deliver unprecedented levels of uncertainty, both political and economic. We're genuinely entering the unknown and, by way of preparation, Threadneedle Street has just increased the pressure on households.

To raise rates in the shadow of outright politico-economic uncertainty is risky at best, reckless at worst.

If Brexit turns into a Black Swan, there is every chance the recent rate rise will be reversed rapid. If that happens, Mark Carney and crew will have lost just about every shred of credibility they had — for good.

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