Almost Right

Bank of England Policy c. 1982 and One-Eighth Rate Moves


The last time the Bank of England (BoE) raised interest rates was on 5th July 2007, less than three months before Northern Rock went under, when its Monetary Policy Committee (MPC) hiked by 25 basis points to 5.75pct .Hindsight is a wonderful thing but  looking back its quite shocking how the Bank raised rates whilst the interbank deposit markets were freezing up. Almost as if they wanted to put the final nail in the coffin of these Northern Upstarts.


Thereafter, the MPC steadily sliced rates to the current 0.25pct, a record low set post-Brexit on 4th August 2016. While I recently wrote about the 10-year anniversary of Northern Rock, the 10-year anniversary of the Bank’s last rate hike came and went. But let’s be clear: it’s now more than a decade without any rate hikes, which even to an old-hand like myself is an extremely long period, the consequence of which is that there is a whole generation of traders and brokers who have never lived through a UK tightening cycle. Also lost through the sands of time is the bank’s extraordinary policy between 1979 and 1982 that hold a few clues on what Carney & Co. may do next as they ponder an increase.


The early ‘80s were not just a world of flash cars, shoulder pads and big hair. It was a world where London was adapting to open-outcry trading, with our colourful trading jackets we proudly wore often banned from restaurants and bars. The City was not ready for the future. Back then, three old stockbrokers in a champagne Bar called The Greenhouse complained about my appearance only to be told by the legendary local Alan Dickinson: “We are the Fffing future”. As open outcry trading took off so did Inflation it had returned by the late ‘70s and with it the use of interest rates as a way to control it. Governments slavishly followed the monetarist Milton Friedman and the Fed funds rate touched 20pct (not a typo) whilst the Bank rate in the UK peaked at 17pct.




What happened? We tipped over into a deep recession – almost as deep as the one we have just experienced. Interest rates were initially slashed in 1pct and 2pct moves, and then increasingly slowly until the bank often moved in 0.125pct steps. Or one-eighth of a percent – read and digest. Rates eventually reached the low of the cycle on 2nd November 1982 at 9.1250%. (


Carney and his cohorts face a different economy, world and set of traders when the MPC meets next Thursday 2nd November 2017, but there is a strong argument for caution from the doves on the committee who may suggest raising rates by 0.125pct versus the widely anticipated 0.25pct.


Some City analysts think this highly unlikely, like Adrian Schmidt, head of analysis at FX Economics.


“It would smack of indecision and half measures and lead to a weaker pound which the bank seems to want to avoid, though personally I think a weaker pound is probably needed,” he said.


“I don’t think any central bank would consider such a small move,” said Keith Grindlay, global macro strategist and author of advisory Macro Thoughts UK. “Though there were rumours when the ECB was cutting…and central banks are good at surprises.”


Carney himself dismissed such a scenario when LiveSquawk News asked him this very question at the bank’s last press conference.


However, Carney would be able to appease both doves and hawks with such a move. By nudging the base rate by a fairly nominal amount, remember 0.25pct doubles them, he can show that he is acting prudently in being gentle with the fresh shoots of growth whilst ushering out the era of ultra-low rates. That cycle is at an end and we are moving gently towards a norm of maybe 2.5pct. An eighth may also be a gentle introduction for those virgin up-cycle traders who, without doubt, will be wrong-footed whilst us old boys will do as always and ”buy the rumour and sell the fact”.

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