CA Summit: Trevor Williams – Carney boxed in a corner on QE and interest rates

The Bank of England may baulk at raising interest rates in November despite strong indications of a rise from Governor Mark Carney, a leading economist has told delegates at the Corporate Adviser summit today, writes John Lappin.

Trevor Williams, visiting professor at the University of Derby and former chief economist at Lloyds Bank Commercial Banking, said: “The Governor has said he might raise interest rates possibly at the November 2nd meeting. I have to warn you he has form on this. He said three times over the last few years that he would raise rates and baulked at the last minute.”

He also questioned whether circumstances really justified a rise, and suggested if Carney takes any action at all, it is unlikely may reverse the last 0.25 per cent decrease that had been taken as a precaution against a pre-Brexit slowdown, meaning gilt yields were unlikely to change too much any time soon.

“The domestic economy is slowing so why would you raise interest rates? You might reverse the quarter point that was cut last year after Brexit. Yet it isn’t a 100 per cent certain, though the markets think it is odds on at the moment. In any case, a return to 0.5 per cent is not exactly putting your foot on the brake.”

Williams pointed out that the move to quantitative easing made it very difficult to judge the real price of assets while QE had clearly not worked quite as planned, because it has not boosted economic activity to the point where central banks could normalise policy.

He added: “That money has not gone as was intended into investments in plant and machinery to boost economic activity. When the government buys bonds from the private sector, they give them cash and it is up to those who have sold their bonds to decide what to do with them.”

Much of the money had gone into financial assets. He added: “They don’t know what will happen to those prices until governments no longer hold these bonds. Not only is the interest rate at a record low, potential changing behaviour, but QE has maybe distorted financial markets. What is an equity worth without this artificial boost? Answer, we do not know.”

He added that there was still uncertainty even about how to unwind QE.

“We don’t even know how to unwind QE. Do you sell the bonds back or do you let the bonds mature and not reinvest the proceeds as they do so. That will take about 15 years with maturity of these bonds at about 13.5 years.”

He said that the good news was that a combination of low rates and low oil prices was driving a global recovery in most sectors and regions. One issue however is that the UK is the slowest of the G7 economies with the natural rate of growth now at about 1.5 per cent per annum.

He added that while Brexit will slow the economy, the real challenge for the UK was some of the things that caused it – such as low productivity, falling real pay, with other challenges emerging such as an ageing population and fewer tax payers to support them.