BoE Pro Rate Hike Members Face Tough Road Ahead

There was a time when central bankers could show up at the annual shindig in the Rockies organised by the Federal Reserve Bank of Kansas and think they had it cracked. Back before 2007, the mood at the annual Jackson Hole symposium was assured, even smug.

No longer. These days, central bankers are full of doubt. They wonder why the response to the colossal stimulus provided in response to the Great Recession has been tepid. They wonder why the old relationships between growth, unemployment and wages have broken down. And they wonder what will happen when they finally abandon the zero-interest-rate regime now in force for more than half a decade.

As Stephen Lewis, economist at broker ADM, puts it: "Only when central banks embark on their normalisation process will the truth be revealed. For all we know, they may have been applying cosmetics to the mummified remains of their economies."

For some time, the markets have seen the Bank of England as the major central bank likely to start the normalisation process first. Last week's news that two members of Threadneedle Street's monetary policy committee – Martin Weale and Ian McCafferty – voted for a quarter-point interest rate rise did nothing to dampen speculation that the Bank was getting close to dipping its toe in the water.

Mark Carney, the governor, seemed to be steering markets in that direction when he said that rates might rise even before wage growth outstripped inflation. Surely that was a signal that higher borrowing costs might be in place before the end of the year?

Well, not quite. Carney's comments need to be seen in the context of Bank forecasts which show that wages will not start to rise more quickly than prices until the second quarter of 2015. Since most City firms currently expect a rate rise either in the final three months of 2014 or the first three months of 2015, Carney's remarks should hardly have come as a surprise.