Filmed by Rod Fitzgerald. Produced by Daniel Garrahan
It was a different world. Mervyn King was governor of the Bank of England. The committee voted 6 to 3 in favour of a rate rise from 5 1/2% to 5 3/4%. Wages were growing at 3.6% per year, and so people thought the economy needed a little bit of action to cool it down a bit. No one saw the financial crisis coming, and yet that was only eight weeks or so away. Everyone thought interest rates would rise further, to 6% in August or September 2007.
A decade on, the world is completely different. Interest rates are only 1/4%, and so if they were to rise, which three members of the Monetary Policy Committee want at the moment, the fear is that this would really hit households very hard. Partly, because there's so much debt out there, and partly because household finances are already very fragile. So any interest rate rise from a 1/4% up to 1/2% would have a much bigger effect now potentially than that rise a decade ago, from 5 1/2% to 5 3/4%.
With three members voting for a rate rise in the June meeting, you've got to think it's possible the MPC will raise interest rates relatively soon. Now, we didn't think a few months ago that this was possible. We thought the first rate rise would be in 2018 or 2019, but now the Bank of England is looking at the data really closely. What will make them switch and vote for a rate rise? What will make there be a majority on the committee? Well, I think you'd have to see a number of things.
You'd have to see business investment and exports doing better than they're doing now, so that they offset the slowdown in consumer spending we're already seeing. If we see that, so households not doing too badly, business is doing well and investing more, and export is doing well, then I think you could see an interest rate rise really quite soon. But so far, we haven't seen it. So I think we're not going to see it in the August meeting, but we might see it later in the year. But for that to happen, you've got to see an improvement in business investment and an exporting, and so far, we haven't seen it.