'No need for rate rise' as bankers voice concern over EU

The Bank of England won't necessarily raise interest rates if unemployment drops below 7%, it said this morning. Phew.

by Emma Haslett
Last Updated: 22 Jan 2014

It’s the first day of the World Economic Forum in Davos, so expect global recovery and the strength of the EU to be hot topics for the next few days. You can’t argue with the fact that things have been going particularly well for the British economy over the past few months (as suggested by PwC’s survey showing British bosses are the ‘most optimistic’ at Davos).

This morning, the Bank of England’s Monetary Policy Committee gave businesses even more reason to relax: minutes of its previous committee meeting suggested that there is ‘no immediate need’ to raise interest rates, even if unemployment drops below 7%.

Admittedly, it’s a bit embarrassing for Bank of England governor Mark Carney, who unveiled his forward guidance, which pegs interest rates against unemployment, with much pomp and circumstance during the summer. But this morning the Office for National Statistics published figures showing unemployment fell to 7.1% during the final quarter of 2013. That suggests it will fall below 7% this year, two years earlier than Carney had expected.

‘Members… saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future,’ the minutes said.

‘Moreover, it was likely that the headwinds to growth… would persist for some time yet, and that inflationary pressures would remain contained. Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.’

So that’s a relief. But it sounds like bankers are worried recovery could still turn around. The British Bankers’ Association has sent a submission to the UK government saying there is an ‘overwhelming’ case for the UK to forge closer ties with Europe, the FT reported this morning.

Eh? MT is more used to hearing vociferous complaints from British banks about the tyranny of European regulation – but apparently the BBA is worried the UK is under-represented in Brussels, and needs to do more to make the single market work.

‘The single market for financial services is a significant factor in the success of the UK as a financial centre and therefore of considerable value to the economy,’ it said.

The submission was part of the government’s ‘balance of competences’ review, an ‘audit of what the EU does and how it affects the UK’. Confusingly, the review is being executed over the course of four ‘semesters’, beginning in the Autumn of 2012 and ending this Autumn.

So far, the review has published its findings on the single market, taxation, animal welfare and food safety, health, development and aid, and foreign policy, concluding that the balance of powers between the EU and UK governments is ‘broadly appropriate’. Reactions, though, were mixed – UKIP leader Nigel Farage, for instance, called it a ‘futile and cynical PR exercise’ (but then he would…). Some Conservative MPs are reported to be on Farage’s side.

But the BBA says that although some of the EU’s powers are ‘not always exercised consistently’, the onus should be on ensuring the UK has a voice. Apparently, the number of UK nationals working at the European Commission has fallen by nearly a quarter in the last seven years, and is now 4.6% of the total, versus France’s 9.7%.

And the BBA isn’t the only one worried: Jim Cowles, Citigroup’s chief executive for Europe, the Middle East and Africa, has warned the Treasury that there is ‘mounting concern’ that the UK would continue to operate as a global financial centre if it exited the EU.

‘It’s not that international companies will stop investing in Britain but their investment just won’t be at the scale we have become accustomed to,’ he told the FT. Which could potentially undo all the government’s good work. Bring on the referendum…

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