As we move towards the next Monetary Policy Committee (MPC) meeting, due in a couple of weeks' time with the results of the vote known on the 18th June, it feels as though we have entered a very familiar stage of the interest rate cycle.
The decision itself remains a fortnight away, yet the period between meetings has once again become filled with speeches, interviews and comments from policymakers, economists and market commentators, all attempting to offer clues about where Bank Base Rate (BBR) may be headed next.
In recent days, we have seen comments suggesting that the case for a BBR increase is growing from one MPC member, while Bank of England Governor himself, Andrew Bailey, has stressed that holding rates at their current level remains an active policy choice rather than a passive one.
That inevitably raises an important question for lenders, advisers and borrowers alike. What exactly is the market supposed to take from these messages, particularly when the next inflation figures won’t be released until the days leading up to the MPC meeting.
The issue is not that different views exist. Debate is a perfectly healthy part of the policymaking process. The issue is whether the constant flow of commentary between meetings genuinely helps the market understand the Bank's thinking or whether it simply creates more uncertainty at a time when confidence remains fragile.
Has anything fundamentally changed?
When considering the latest comments from policymakers, it is worth asking whether anything materially has changed since the MPC last met?
The risks posed by geopolitical tensions, energy markets and global supply chains were already well understood at the time of the previous meeting. Policymakers were fully aware of the potential inflationary consequences of higher oil and gas prices, particularly if events in the Middle East were to deteriorate further. Those risks remain present today, but they are not new.
Equally, the latest inflation figures showed a fall rather than an increase. Of course, we are still waiting for the next release and the picture may well look different once those numbers arrive. However, until then, much of the discussion appears to be based on assumptions about future inflation rather than evidence of inflationary pressures that have already emerged.
That distinction is important because monetary policy is ultimately intended to address inflationary pressures within the economy. If any renewed inflation is largely driven by global energy markets and international events, then we should ask what impact a BBR increase would realistically have on those underlying causes?
An increase in UK interest rates will not lower global oil prices, reduce energy costs or influence events taking place thousands of miles away. As the MPC itself has acknowledged previously, there are limits to what monetary policy can achieve when inflation is being driven by external factors.
Why lenders should pay close attention
While much of the public debate understandably focuses on borrowers, lenders have a particular interest in how these discussions develop because market expectations often move long before policy decisions are actually made.
Mortgage pricing is influenced by far more than BBR alone. Funding costs, market sentiment and swap rates all play a crucial role in determining where product pricing ultimately sits. That is why the current debate matters.
Over recent weeks, there has been growing evidence of competition returning to the mortgage market. Product rates have been cut, lenders have become more active and advisers may well have been in a position to have more positive conversations with clients about their borrowing options. There has been a sense that market conditions were beginning to stabilise after a number of very uncertain months.
However, that progress can quickly be disrupted when markets start to price in the possibility of further tightening. Even before the MPC reaches a decision, swap rates can react to changing expectations. Funding assumptions can shift. Product pricing strategies can be reviewed. Rate reductions that may have been planned can be delayed or withdrawn altogether. In other words, commentary itself can influence market outcomes.
The cost of uncertainty
For lenders, the challenge is not simply predicting the next MPC decision. It is managing the consequences of uncertainty in the weeks leading up to that decision.
When policymakers appear to be sending mixed signals, markets naturally attempt to interpret every comment for clues about future action. That process can create volatility, influence funding costs and ultimately affect mortgage pricing long before any formal change to BBR takes place.
None of this is an argument against raising rates if the evidence ultimately supports such a move. The MPC has a clear mandate and must respond to inflationary pressures when necessary. However, there is a significant difference between acting on confirmed evidence and allowing speculation about future events to shape market behaviour before the relevant data has even been published.
We do not have a programme of forward guidance in place in this country, but in lieu of that we certainly seem to have a programme of ongoing speculation and discussion about what might happen from MPC members themselves.
The problem is such public utterances inevitably generate more questions than answers. In a mortgage market that has worked hard to rebuild a little confidence recently, and hopefully restored a little momentum, BBR noise such as this has its consequences. It is another example therefore of the need to be careful what you say and when you say it.
