Evanomics

My prediction - July

• Evan Davis | Small Change |
• 5 Jul 07, 10:00 AM

My prediction today is that interest rates will rise, but I am much less sure of that than everybody else appears to be.

My approximate probabilities are:

Quarter point rise - Two-thirds
No change - One-third

The reason you might expect a change is that the Bank's last inflation forecast implied at least one more is necessary. And if only one MPC member switches vote, we'll get that rise today. Moreover, the governor, Mervyn King, is in favour of a rise. He was opposed by three of his own internal bank colleagues last time, so one of them might move on to his side now, to avoid the (minor) embarrassment of him being out-voted twice in a row.

The reason you might not expect a rise is that little has changed since the last vote which was to delay acting; we are only now a month away from the next inflation report, when there is a new inflation forecast. The MPC prefers to move in those months.

But most significantly, it is still rather early to tell just how biting the previous four rate rises will be. The pain seems to have been delayed by the prevalence of fixed rate mortgages that have yet to expire. Once they do expire of course, the pain to the mortgage-holders is delivered in one hefty dose. We are only beginning to see that occur.

Until we know what the full effect of the other rises is on the economy, the bank has to be wary about over-doing it. Several MPC members think that delaying another rise for a month to see how the existing rises bed down is not particularly dangerous.

Incidentally, if the MPC does vote against the governor again, there will undoubtedly be a flurry of talk about his position being awkward and possibly untenable. Some commentators will say the MPC "lacks confidence" in Mervyn King's leadership..

I'm deeply sceptical.

Disagreements around the timing of quarter point changes in interest rates are of little real intellectual significance. Surely anyone who understands interest rates understands that.

It would be odd if a system built around individual voting - as ours is - rather than collective responsibility, accidentally morphed into one in which everyone had to agree with the governor (or that the governor had to agree with everyone else).

That's not to say there aren't real disagreements on the MPC over other things - such as the importance of money supply in determining inflation. But if our system can't cope with these stresses, MPC members would forever have to be thinking about the politics of how they vote as well as the economics, which would be unlikely to improve decision-making.

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