Will rates really stay flat for another three years? That seems to be what the markets are now saying about UK base interest rates and if that is right, there has been a radical shift in outlook over the past six months. Remember that last autumn Mark Carney was suggesting that people should expect the first increase in British interest rates about the turn of this year — that’s three months ago? If the Governor of the Bank of England can not only misread markets but also misread Bank policy, what hope is there for the rest of us?
So one of the things to look for in the next few days will be how markets react, after a weekend’s due consideration, to hints, warnings and suggestions last week from several central bankers that rates will stay low for longer. Even in the US, which has already had one rate increase, the mood has shifted from expecting three or four more rises this year to one or two. That at least was what was read into cautious comments by Federal Reserve chairman Janet Yellen last week. There is one immediate way to catch a feel for this: long-term rates. Will 10-year gilts and US Treasury bonds rise or fall?
But if history teaches us anything, it is that at times like this, when conventional wisdom holds to an embedded idea, you should start asking: what if? Six months ago, the conventional view was that both US and UK rates would be heading up by now, with the Fed giving cover, so to speak, for the monetary policy committee to move. Maybe in another six months there will be a similar overturning of convention. The argument goes like this. The trigger for that first rise in rates here will be any sign that inflation is heading back towards, or above, the 2% central point for consumer price inflation. But there will have to be subsidiary support in the form of reasonable economic growth, stable unemployment and rising employment.
We won’t get any clear signals on inflation or the real economy until after the Brexit vote, so nothing can happen until the summer. If the vote is an Out, we really are in unknown territory. But assuming that the remainers do win, which in my view is much the more likely outcome, then things will look very different come July.