BLANCHFLOWER: The looming Bank of England rate hikes rekindles 'feeling of August 2008'

  • 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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