Communication is a wonderful thing – isn`t it? An MPC member says that interest rates `could` rise by a `fair` amount – pretty specific stuff then; and surprise, surprise the Bank of England`s Chief Economist lets drop that the Bank is starting work on a new forecast for interest rates which will be issued with its November inflation report.
So what has actually been said? Interest rates will probably rise at some time in the future, and the Bank is going to give some interest rate updates in its regular inflation report!! Hardly ground breaking is it? Also not particularly worthy of the UK news media`s attention to the comments. It is obviously an issue that the FX market needs to know of, but let me reassure you, nothing has changed to radically alter the interest rate outlook in the UK. There is no new news here to cause anyone to reassess their estimation of the value of sterling.
We will get some more good news on Friday when we can expect another positive GDP figure, probably showing the best quarterly performance this year – in advance of the second quarter number of 0.7%. The Bank will also tell us in the November inflation report, when it is issued, what we already know, that unemployment is falling a little faster than previously estimated.
All good news for the pound then? Well, not really. Just confirmation of what we already know, but certainly nothing negative. Growth is still the key, both to interest rates and unemployment, and we may need some new thinking to get this started. The UK banks are now in as good a financial position as they have been for the last 5 years, and yet the single biggest criticism that comes from businesses over here is the difficulty in securing financing for expansion and innovation. It would appear that the banks are suffering from the psychological wounds of the past when it comes to lending, and are causing a blockage. What about the banks each pledging a proportion of the money they have available to lend, to an independent body that would be responsible for lending to business with an outlook less tainted by the past, and perhaps with a less formulaic approach to business plan submission. The returns would of course accrue to the bank`s, and the success or not, of the venture might give a clue to the future, and even re-shape the existing model of business finance.
Just one thought, amongst many more that will be needed , but we really do need to try actively to encourage growth. The current system is failing us. If we are going to shrink the state here in the UK, and encourage the private sector to produce jobs, we don`t appear to be able to rely on the old system, disfigured as it is by the events of the past. Interest rates are going nowhere in the next couple of years, and we have to ensure that we make the most of this time to sow the seeds for future prosperity.