This morning we heard from the Chancellor and the Bank of England governor. The Mansion House speeches, delayed as a consequence of last week’s horrific fire in West London. Primarily directed at a City audience, there were some questions that we representatives of manufacturing were also hoping to get some answers on.
Was the 5-3 vote to keep interest rates on hold at last week’s MPC meeting a signal that Bank Rate was set to rise sooner rather than later?
Monetary policy decisions don’t often surprise, but three MPC members voting last week to increase Bank Rate came close. While acknowledging that subdued outlook for real incomes and consumer spending, the minutes implied a bit more confidence that investment and trade ‘were likely to provide countervailing support’. In addition, the view that ‘domestically generated inflationary pressure had also increased in recent months’ were the makings of the case to begin the gradual increase in rates that have been on and off the table for some time.
We have had some reservations about judgements of a pick-up in investment – not least in light of the uncertain path to Brexit. Nor have we noted further reasons to be worried about the persistence of inflation, beyond those discussed in the May Inflation Report.
The Governor used the early part of his speech to provide a fair bit more clarity on these questions. From his perspective, ‘given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures ….. now is not yet time to begin that adjustment.’
So the holding majority looks like it will continue to win out for the time being.
Can we expect a change in tone about the economic outlook in the Bank’s August Inflation report?
Carney’s speech didn’t feel like it was teeing markets up for a change in tack in the coming meetings. Indeed, uncertainty about the evolution of household spending and investment, questions over what, if anything, will spur stronger wage growth and the inevitable Brexit what ifs are still very much front of mind.
Furthermore, the majority of his speech concentrated more on the rest of the world – current account imbalances, the future of global trade and some thoughts on policies required to crank up productivity growth. For me, a well-timed reminder that there is a lot happening beyond our shores and issues other than Brexit should require us to look up every now and then.
Any early indications that a change of tack is likely from HM Treasury in the Autumn Budget?
Similarly, there were few signs that the Chancellor was laying the groundwork for a big policy shift either. It’s still about the three ‘Ps’ – productivity, productivity, productivity – as a route to higher wages, stronger growth and the continued (and still needed) reparation of the public finances.
But reassurances to the audience were also on offer. That the UK government would ensure that firms needing patient capital and infrastructure projects in the pipeline would have access to the finance they needed – whatever our relationship with the EU and the EIB look like in future.
Critically, negotiating outcomes on Brexit were clearly outlined:
- A comprehensive agreement for trade in goods and services
- Transitional arrangements to avoid unnecessary disruptions
- Frictionless customs arrangements
We do think that this does start to offer up some clarity on the government’s first and best path for Brexit – and chimes with the outcomes business groups called for earlier this week. The prominence given to transitional arrangements in this list is especially welcome and will hopefully replace the mantra of ‘no deal is better than a bad deal’.