The Bank of England will probably keep emergency stimulus in place until the end of the year before raising interest rates “quite quickly,” former Deputy Governor John Gieve said.
“What I’m expecting the bank to do is do nothing this month and indeed the autumn,” Gieve said at an event organized by Fathom Financial Consulting in London today. “But when they do start to raise rates I expect them to raise them faster than most other forecasters seem to think.”
Gieve’s comments suggest a quicker stimulus withdrawal than that signaled last week by Governor Mervyn King, who told lawmakers there may be a “considerable” time before the benchmark interest rate returns to “normal.” The central bank will keep its rate at 0.5 percent on Aug. 5, according to all 59 economists in a Bloomberg News survey.
“If by the end of the year we’re getting solid growth over the quarters, then I’ll expect them to raise rates to sort of 2.5 to 3 percent quite quickly, rather than inch them up to 1 percent, which I think is in most forecasts,” Gieve said.
The rate will increase to 1 percent in the second quarter of 2011, according to the median of 38 forecasts of economists provided to Bloomberg News.
The Monetary Policy Committee considered expanding its 200 billion-pound ($318 billion) stimulus last month, according to the minutes of the meeting published on July 21. Gieve, who worked at the central bank for three years until February 2009, said officials shouldn’t loosen monetary policy further as the economy is showing signs of strengthening.
“I don’t think they should be considering quantitative easing right now because growth figures are encouraging,” Gieve said. “They would need negative growth in a quarter to get back to thinking about that.”
Gross domestic product rose 1.1 percent in the second quarter, the most in four years, and almost twice the median forecast in a Bloomberg News survey. King said July 28 that policy makers “must be careful not to read too much into one number.” Inflation was at 3.2 percent in June and has been above the government’s 3 percent upper limit for four months.
“Not only are we going to have subdued growth, but we’re going to having this increased inflation pressure,” former policy maker Charles Goodhart said today at the same event. “Can you under those circumstances on the MPC undertake a further extension of QE? It would be incredibly difficult.”
Goodhart served on the MPC from 1997 until 2000.