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Vince Cable warns early rate rise could jeopardise recovery

Business Secretary Vince Cable has warned an increasingly hawkish Bank of England from deflating the recovery with early rate rises.

The latest Monetary Policy Committee minutes, published yesterday, show committee members are leaning toward an earlier hike in the base rate than markets had anticipated, perhaps before the year’s end.

According to the Telegraph, in a speech at Bloomberg’s headquarters in London yesterday Cable said: “If these incipient inflationary pressures lead to a rise in interest rates sooner and further than is warranted by the economy as a whole, it could place in jeopardy our hopes for a sustained and balanced recovery.”

The Guardian reports Cable also criticised the Bank of England for imposing capital requirement rules that favour mortgage lending over lending to small businesses.

The Bank believes SME lending is more risky than providing credit for a mortgage and so it requires more capital to be held against business loans.

Cable said high street bank bosses had told him business lending is unlikely to increase until the current rules are reformed.

He said: “The way the regulatory system operates has undoubtedly had a suffocating effect on business lending and particularly on our exporters.

“Not surprisingly, the result is that banks pump out lending in the mortgage market, while lending to small businesses is restricted. This directly stems from the rules on which the regulatory model is based and has had a very damaging impact.”

“There are important decisions ahead for the Governor of the Bank of England on capital, and I will watch carefully how any changes in the leverage ratio affect…business lending capabilities.”

Cable added: “I’m not suggesting there is some perverse individual blocking all this. I just think the situation could be freed up and the decision-makers are sitting inside the Bank”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. A couple of points here.

    What we need is a consistent message. Not this “maybe”/ “maybe not” that appears to be rearing its head. Carney’s ‘forward guidance’ was supposed to give this consistency of approach and expectation but lately that seems to have gone out of the window with no one at the helm seemingly knowing what to do for the best…. That is more worrying than rate hikes….

    Which brings me onto point two. Rates aren’t the issue in getting lending into the market whether its for commercial or residential. The issue is lending policy and criteria.

    You can either tell banks to lend responsibly and to be strict about who to lend to and what to lend on OR you can have banks thrusting money into the market to stimulate recovery. Rate has little to do with whether funds are loaned or not.

    You cant have it both ways and yet its seems that is what Monetary Policy and Government are trying to do.

    How bizarre.

  2. @Chris Hulme

    I totally agree, altogether a destabilising concoction for all on the receiving end of the markets % mortgage lenders!

  3. Despite the uncertainty suggested above, at least the decisions are broadly detached from political need – if a rate increase is indeed necessary in the coming months, could you imagine a Government about to start an election campaing doing so?

    Furthermore, there are currently conflicting pressures on interest rates so this situation, plus historic debt levels introducing significant sensitivities to rate rises – presumably results in the BoE have an interesting set of balls to juggle!

  4. @Paul Stocks
    There has been an overt separation of Monetary Policy from Political Whim for some years now so political changes realistically shouldn’t have any bearing on rates and the effectiveness of monetary policy.

    Similarly, yes the Policy Makers do have many [interesting] balls to juggle but this is no different now than any other year. If the BoE have dropped the balls being juggled, its pointless trying to give the forward guidance as to how many balls will be in the air if they don’t know how to juggle in the first place.

    Admittedly, its a tricky one…. but its better to say nothing than to get hopes and expectations up only to let everyone down when its crunch time. It seems like Mr Carney is trying Eddie George’s old tricks but failing miserably at this point…. A bit like Bush following Clinton – bring back Eddie George!

  5. The Cynical Broker 19th June 2014 at 4:17 pm

    Wow! You know things are bad when Vince Cable starts making sense !

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