UK economy not ready for rate hikes, ex-BOE official says

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Mario Draghi Mark Carney
European
Central Bank (ECB) president Mario Draghi (L) and Bank of England
governor Mark Carney arrive at the Bank of England’s Open Forum
2015 conference on financial regulation, in
London.

Reuters/Suzanne
Plunkett



  • United Kingdom economic growth beat expectations in the
    third quarter, and inflation has picked up.
  • The Bank of England is hinting at possible interest
    rate hikes in coming months.
  • Ex-BOE member David Blanchflower tells us the economy
    is not ready for higher borrowing costs.

Stronger economic growth and higher inflation in the United
Kingdom have
raised market expectations
that the Bank of England could
begin raising interest rates.

A rates rise would be aimed at recharging an anaemic economy
scarred by the financial crisis and would be after a prolonged
period of low borrowing costs.


Despite the difficulties surrounding Brexit
, the figures have
prompted Bank of England Governor Mark Carney to declare that

rate increases may be appropriate in coming months.

However, David Blanchflower, a former member of the central bank,
now at Dartmouth College, fears the recent data are offering
false positives for an economy that continues to struggle with
weak productivity and stagnant wages.

“Inflation is set to drop after one-off effects of the pound’s
decline,” associated with the initial reaction to last year’s
Brexit vote, Blanchflower told Business Insider.

The Bank of England’s Monetary Policy Committee may be “set to
make a huge error” if it does follow through on tightening
monetary policy, he said.

“This has the feeling of August 2008,” Blanchflower said,
referencing the time when the central bank was tightening
monetary policy even as the UK and global economies slipped into
the worst recession in generations. “There’s zero in the data to
justify a raise.”

Gross domestic product
grew by 0.4% in the third quarter
, above forecasts for a 0.3%
rise, while annual growth was 1.5%.Core
consumer price inflation
climbed 2.7% from a year earlier,
the highest since December 2011. Annual inflation also picked up
to 2.9% in August, accelerating from 2.6% in July.

Blanchflower said the third-quarter GDP reading, despite beating
market expectations, masked a persistent weakness that could
intensify with Brexit.

“We are looking at growth of under 1.5% every year from 2017
through 2019,” Blanchflower estimates “Even then the risks are to
the downside due to uncertainty over Brexit.”

In addition, “falling real wages and falling retail sales suggest
this is no time for a rate rise,” he said.

One comforting note: Carney has often hinted at interest rate
hikes and not followed through —
starting around 2014
.

Maybe it’s better to watch what he does rather than listen to
what he says.



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