Ten Reasons UK Rates Will Not Rise

Mervyn King, the Governor of the Bank of England, made it clear to the market on Wednesday that UK rates would have to rise at some point.

Governor of the Bank of England Mervyn King
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Governor of the Bank of England Mervyn King

Bank Rate will need to rise at some point. It cannot stay at this level indefinitely,” King told reporters in his latest grilling over inflation. “That doesn’t tell you, I’m afraid, when Bank Rate will rise.”

Earlier this year a rate hike was seen as a foregone conclusion but the outlook for the UK economy is very uncertain — uncertain enough for Danske Bank to find 10 reasons why British borrowing costs will not rise anytime soon.

“We have consistently argued that the UK economy is too fragile to sustain higher borrowing costs and stated that fiscal tightening crowded out monetary tightening,” Danske Bank chief analyst John Hydeskov wrote in a research note.

10 Reasons Not to Be Cheerful

With a full 10 reasons to bring you for why the UK will not hike rates, you could be forgiven for being so gloomy that by reason five you do not want to carry on, so let’s make this quick.

  1. The output gap is too large and the economy hasn’t recovered enough from the last recession.
  2. Too many Britons are unemployed and the private sector is incapable of absorbing the projected public lay-offs.
  3. Current inflation is high but inflation expectations are leveling off and there is no wage pressure.
  4. Consumer sentiment is already very negative as with previous recessions; could result in a setback in private consumption.
  5. Growth in disposable income for households, as measured by earnings growth minus retail price growth, has been negative for more than a year now.
  6. Business sentiment — most notable in the all-important service sector — is deteriorating, albeit from a healthy level.
  7. After years of solid expansion, broad money growth — closely associated with prices according to the quantity theory of money — has now turned negative.
  8. The UK debt burden is growing rapidly and the cost of servicing debt will rise if interest rates rise too fast and by too much, as was pointed out by the Governor recently.
  9. Exporting businesses need all the support they can get — if the pound appreciates, the trade balance, already bleeding, could worsen further.
  10. The hawks in the Monetary Policy Committee are losing faith in the need to tighten monetary conditions.