No wonder the pound is rising – 2018 could finally be the year that hawks get their way and push up interest rates
The start of next week will mark nine years since the Bank of England slashed interest rates to an historic low of 0.5 per cent and unleashed its first round of quantitative easing, an unprecedented measure designed to counteract a deep recession triggered by the financial crisis.
Ever since, hawks and doves have squabbled over the timing of policy normalisation – in other words, when should central bankers feel comfortable enough to lift rates to a more historically normal level?
Overall, the doves – economists favouring a loose stance – have been victorious time and time again. Even when inflation has reared its ugly head (and remember, it soared over five per cent at the end of 2011 and has exceeded the Bank’s two per cent target for most of the current decade) Threadneedle Street’s top officials successfully persuaded everyone that these price pressures were transitory, and would not pose a medium or long term threat.
Read more: Sterling jumps as Bank of England hints at earlier than expected rate hike
While the consequences of such an extended period of stimulus may yet be felt, Bank officials have been correct in their expectation that inflation would not prove to be “sticky”.
Until now.
Suddenly, the mood among the Bank’s Monetary Policy Committee (MPC) has changed. Since the last policy meeting earlier this month, a string of MPC members have made hawkish sounds, pushing sterling higher.
Jan Vlieghe, Ian McCafferty, Ben Broadbent, Silvana Tenreyro, Andy Haldane and the governor himself, Mark Carney, have all spoken about impending hikes. Even “Dave the Dove”, the City nickname given to Sir Dave Ramsden, appeared over the weekend to have changed his colours.
Read more: Bank of England’s deputy dove says faster rate hikes are coming
Last night deputy governor Jon Cunliffe dodged the subject, using a speech in Warwick to discuss separate matters. Cunliffe, alongside Ramsden, was one of only two members to oppose last November’s lift from 0.25 per cent to 0.5 per cent.
But even if Cunliffe holds on to his dovish position, the balance of power is clearly shifting. Andrew Sentance, the ultra-hawkish former Bank official who now works at PwC, was in giddy mood yesterday, citing Bob Dylan. “You don’t need to be a weatherman to know which way the winds blows,” he tweeted. “Higher rates are needed, and soon”.
Finally, nearly seven years after he left the MPC, Sentance could be about to get his way.