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Why an interest rate rise could help the Tories

It would benefit savers and could be seen as a sign of a return to economic normality.

It would benefit savers and could be seen as a sign of a return to economic normality.
George Osborne, followed by Mark Carney, arrives at the Lord Mayor's Dinner at Mansion House. Photograph: Getty Images.

It was just a month ago that Mark Carney sought to dampen expectations of an interest rate rise, stating that rates may remain low "for some time". But in his Mansion House speech last night, the Bank of England governor took a dramatically hawkish turn. He told the inhabitants of the City of London: "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect." With the markets currently forecasting a rise in spring next year, Carney's remarks suggest rates could increase from their record low 0f 0.5 per cent (where they have been for more than five years), before the end of 2014. Increasingly troubled by "early signs" of a housing bubble, the governor has signalled his willingness to deploy the most powerful weapon in the Bank's arsenal.

While economists debate the merits and demerits of the move, what would the political consequences be? It's generally assumed that a rate rise would be damaging for the Tories, one reason why cynics suggested that Carney (who was personally apppointed by George Osborne and awarded a bumper £800,000 salary) would postpone any increase until after the general election. Past Conservative governments, disproportionately reliant on the support of homeowners, consistently sought to avoid rate rises clashing with polling day. Indeed, it was precisely to end such politically motivated policy that Gordon Brown made the Bank of England independent in 1997.

But the politics of a rate rise may be more complex than they appear. A poll last year by YouGov for the Times found that 31 per cent of people believe an increase would leave them better off, compared to just 23 per cent who believe they would be worse off and 32 per cent who thought it would make little difference either way. While some Conservative supporters would curse a rise in their mortgage costs, others would be cheered by a better return on their savings. As Osborne's most recent Budget demonstrated, there are votes to be won in courting this group. The over-60s, who have suffered most from ultra-loose monetary policy, are desperate for signs of a return to normality and, crucially, are the most likely group to turn out.

More broadly, a rate rise could be viewed as a signal that the economy is finally back on track after years in intensive care . Osborne has already publicly claimed that the possibility of an increase is a "mark of success", an assessment that some voters will undoubtedly agree with. Labour argues, with much justification, that a rate rise would be more accurately described as a mark of a failure. As Ed Balls said in response to Osborne's Mansion House speech, it is the government's unwillingness to act on housing supply that has led to the danger of "a premature rise in interest rates to rein in the housing market which ends up hitting millions of families and businesses." But if Osborne is as relaxed as he appears about the possibility of a rate rise, he may not be wrong to be so.