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Interest rates set to fall, and fall, and fall.

 

Here is something strange. The Bank of England Monetary Policy Committee (MPC), which meets once a month and sets the rate of interest, has what are called doves and hawks.  

Sitting well and truly in the dove camp is David Blanchflower.  So far this year, Mr Blanchflower has voted to lower the rate of interest three times. Considering that, until this month, no other member of the committee had voted to lower rates even once, that would seem to make the man a strong fan of cutting rates. In banking speak, he is a dove.

But across from the cote, sitting on their perches, are the hawks. And in their midst is the Bank of England’s deputy governor Sir John Gieve. Until a few weeks ago, he was an arch hawk.  In 21 meetings of the committee, he had voted to increase interest rates six times, and had never voted to lower rates, not once. 

But then this month he changed. It was as if he had had enough of perching up there in the branches, and wanted to sit in the nice warm dovecote. For he flew down, and joined Mr Blanchflower, voting for the Bank of England to lower interest rates.

It was something of a shock, but we can speculate why he changed his mind. Sir John is the hapless deputy governor whose responsibility includes financial stability, and when, earlier this autumn, the Treasury Select Committee felt it was time to ask questions about what the Bank of England was doing when the whole Northern Rock saga erupted,  he got a right grilling.

He handled the questions well, but it must have left him feeling like his feathers had been well and truly ruffled.

In fact so harsh was the treatment, that maybe it was this experience that made former hawk go all dove-like.

But while Sir John was having his road to Damascus experience, the rest stayed firm and voted to keep rates on hold.  There were no other conversions, - or were there?

This is the reason given by the Bank of England, for keeping interest rates on hold:  “Since a reduction in Bank Rate was not widely expected this month, there was a danger that an immediate cut would be misinterpreted, precipitating an unwarranted further fall in the market yield curve."

In other words, it didn’t lower interest rates because no one expected it to, and the Bank feared that if it went against expectations, panic would set in. This also suggests something else - that as soon as markets expect rates to fall, the Bank of England will kindly oblige. And right now, an interest rate cut is precisely what the markets expect. So maybe all the hawk members of the MPC group are in the process of transforming from one species to another - like the American who fancied Jenny Agutter in the film American Werewolf in London.It’s just that in their case, it’s hawk to dove, and no full moon is required.  . 

In fact, many economists think the bank may well provide us with an early Christmas present this year and lower interest rates on December 4.

As for beyond that - well this is what the Bank said: “The central projection in the Inflation Report was conditioned on a market path which included cumulative interest rate reductions of 50 basis points over the next 12 months and a little more thereafter."

Or to put it another way, it reckons that inflation over the following year or so will be such that interest rates will need to come down from the 5.75 per cent where they currently sit, not once, not twice, but eventually three times, falling to 5 per cent.
You may not like it that interest rates are as high as they are; you may not like the credit crunch, but take some comfort from the fact that right now it appears the Bank of England is at least planning to cut rates in the future.


 

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