Who would want to be Mark Carney?
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Who would want to be Mark Carney?

PA- Pensive Mark Carney

The Bank of England is now odds on to raise interest rates at the November meeting of the Monetary Policy Committee in November, after the Consumer Price index reported inflation exceeding 3%, but such a move could tip the UK economy over a cliff.

Almost no other economic indicator favours increasing rates, but with inflation topping 3% and likely to rise, according to the BoE’s governor Mark Carney, it now seems inevitable.

And if Carney really wants to use rate rises to combat inflation, one of the very few tools he has to do so, he will know that a 25bp hike will not be enough.

A meaningful anti-inflationary strategy would likely require continuous monetary tightening, rather than a ‘one and done’ hike. But sustained rate increases would increase borrowing costs and threaten to burst growing consumer debt bubbles.

In the Bank of England's Financial Stability Report, published on June 27, the Bank argued that consumer debt has risen “markedly faster” than nominal household income — consumer credit rose by 10.3% in the twelve months ending in April 2017.

The uneasy balance of rising debt and inflation, combined with a historically low savings ratio, could be managed if the economy was on a tear — but the data doesn’t suggest anything of the sort.

According to EY ITEM Club the UK’s GDP growth forecast for 2017 is 1.5% and in 2018 it drops to 1.4%.

Now Carney must write a letter to the Treasury explaining why the Bank missed its 2% inflation target — a rich irony, given that inflation has been driven by the sliding currency caused by the Brexit bungling perpetrated by Chancellor Philip Hammond's cabinet colleagues.

So despite underlying economic data being unsupportive, the UK lending industry is now preparing for a change in strategy from the BoE and potential rate pressure on borrowers.

As UK mortgage industry veteran Tony Ward, now CEO of Clayton Euro Risk, wrote in a blog “despite serious misgivings,  I think that the time is nigh, and next month, we will see the first increase in the cost of borrowing in more than nine years, notwithstanding any horrendous sets of economic data coming out in the next few weeks.”

These serious misgivings are likely shared at the BoE.

There are few good options ahead for Carney, who now faces a choice between taking the blame for not controlling price inflation through rate rises, or taking the blame for the possible default wave which could follow such a move.

The BoE will undoubtedly try to balance these factors prudently, but any further inflationary increase will almost certainly lead to increasing pressure to hike faster, saying nothing of debt bubbles increasing if rates are kept any lower for longer.

Uneasy lies the head that wears the crown on Threadneedle Street.

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