Back in the day, central bankers were seen as boring. Now we hang on their every word, as if they were gods.
In 2012, European Central Bank president Mario Draghi single-handedly saved the euro by saying he would do “whatever it takes” to save the beleaguered currency.
He didn’t have to actually do anything. Three words were enough.
Last week, it was the turn of our own central banking deity, Bank of England governor Mark Carney, to sway the world with words.
Interest rates, he said, were likely to rise “sooner than markets currently expect”.
Everybody went crazy.
Five Words To Save The World
The pound soared, as global investors poured their money into sterling, hoping to get a better return when UK rates rise.
Mortgage lenders pulled their best deals, while brokers warned borrowers to lock into long-term fixed-rate mortgages, before soaring rates make their monthly payments unaffordable.
Savers felt their prayers had been answered. After five years of 0.5% base rates, salvation was coming.
And all it took was five words from a central banker.
Can You Stand the Shock?
Mr Carney’s statement was certainly a shock. Most analysts didn’t expect interest rates to rise for at least another year. Now they are pencilling in a rate rise in the final months of 2014.
For overstretched homeowners, rising rates could quickly turn into a financial shock as well.
For savers, however, the shock can’t come too soon.
Calm down, Dears
In all the excitement over Mr Carney’s base rate bombshell, we are in danger of raising unrealistic hopes in savers.
Personally, I don’t think the Bank is in any hurry to hike base rates. With inflation falling to 1.5%, well below the Bank’s target of 2%, there is no pressure from that direction. Quite the reverse.
Soaring house prices, up 9.9% in the last year according to official statistics, are a far bigger concern. But the Bank already has plenty of tools to calm the market, without hiking rates.
Access to mortgages was tightened in April, via regulatory overhaul the Mortgage Market Review. That is already starting to cool demand.
Chancellor George Osborne recently said he would give the Bank the power to cap mortgages, to stop lenders running riot.
Mr Carney certainly won’t want to undermine the fragile recovery by hiking rates too soon.
It is worth noting that not one of the nine members of the Bank’s Monetary Policy Committee voted to raise base rates today.
The Elusive Mr Carney
Rather than seeing rates rise, savers have watched them fall even lower. Banks and building societies have been slashing rates in the run-up to the new, expanded cash ISA allowance of £15,000, which kicks in from 1 July.
Banks say they can’t afford to offer loss leading rates on such large sums of money.
So the agony for savers is set to continue. And despite Mr Carney’s words this week, they shouldn’t put too much faith in divine intervention from the Bank of England.
