Mark Carney has put the country on notice – the cost of borrowing is going to rise more rapidly than the Bank of England indicated only three months ago.
In some ways, this is good news. Interest rates need to go up more quickly than expected because the Bank expects the economy to grow more strongly than expected this year.
Unemployment is at its lowest for 43 years and, finally, wages are starting to pick up – as one would expect when the jobless rate is so low. That’s the good news.
The bad news is that this growth performance is due, in the Monetary Policy Committee’s view, mainly because the global economy is growing more strongly than anticipated rather than because of anything we are doing at home.
And, because of the UK’s mediocre productivity record, the predicted rise in average earnings is, in the MPC’s opinion, likely to feed into higher inflation. So the Bank Rate needs to go up.
This begs the question: When will the Bank next raise the cost of borrowing?
The market was putting the chances of an interest rate rise in May at 50/50 even before the Bank’s inflation report, but now sees the chance of a rate rise that month as more probable than that, while a rate rise in August – a month after Mr Carney celebrates his fifth anniversary of becoming Governor – is seen as a done deal.
Even a rise in Bank Rate from 0.5% to 0.75% will feed through into higher mortgage rates. Swap rates, which mortgage lenders use to price their fixed-rate home loans, have already been rising with, for example, the two year rate more than doubling during the last 18 months.
So anyone whose fixed rate home loan is up for renewal before August should be looking right now to lock in the current rates. Likewise, mortgage borrowers on a variable rate deal might also want to think about moving to a fixed rate deal.
For savers, the decision is less obvious.
Many savings accounts are already loss-leaders for banks and building societies and so they are less likely than mortgage lenders to pass on any rise in interest rates.
Anyone with both a mortgage and a decent slug of money in a savings account may be better off going for an offset mortgage.
And no homeowner should be expecting much of an increase in house prices any time soon.
As for investors, this may not necessarily be good news, certainly if their investments are predominantly in the FTSE-100 or funds that track its performance.
One big lesson since the Brexit vote is the extent to which the Footsie moves in inverse proportion to the pound, because it is full of big multinationals that make a lot of their sales in dollars and euros, so any drop in the pound flatters those earnings.
By the same token, a rise in the pound depresses those earnings in sterling terms, which is partly why today’s rise in the pound against both the dollar and the euro has been matched by an almost equal and opposite move in the Footsie.
Higher inflation is also the enemy of the bond investor and so anyone with fixed rate savings accounts, or money in UK gilts, will not welcome today’s news.
Higher interest rates also mean higher borrowing costs for business, so the already anaemic rate of business investment – something Mr Carney blames for the UK’s lacklustre productivity growth – looks set to continue, unless companies can find good and specific reasons to invest.
If all that sounds too depressing for words, there is one over-riding reason to be cheerful about what Mr Carney has said today.
The UK has just gone through a period, lasting nearly nine years, during which interest rates were held at record low levels.
They were kept at those levels because the Bank of England’s policy-makers were more frightened about deflation than inflation.
That we are now moving – albeit very slowly – to what is a more ‘normalised’ interest rate environment is undeniably welcome.
And one more piece of good news: higher interest rates not only ought to mean higher annuity rates for those coming up for retirement, they should also mean that pension fund deficits (because scheme liabilities are linked to gilt yields) should also, all other things being equal, start to fall.
That will be excellent news for companies and, potentially, free up more capital to be invested in profitable activities rather than simply filling in pension deficits.