Bank of England Chief Economist Spencer Dale said policy makers will probably face a “healthy” split on when to raise interest rates as the current consensus erodes on inflation risks posed by Britain’s recovery.
“As we go through this year and into next year, as the economy keeps growing and keeps developing, at some point different people will be thinking it’s more or less close to raising interest rates,” Dale said in a Bloomberg News interview in London yesterday. “It’ll be quite natural then to have greater dissent. I certainly expect to see greater dissent and I think it’ll be a healthy thing.”
The comments suggest the unity that Governor Mark Carney has achieved on the nine-member Monetary Policy Committee since he took office in July will come under strain as the U.K. economy builds momentum. The governor’s signature low interest-rate pledge hinges on giving the economy time to absorb spare capacity, a variable which policy makers have a “range of opinions” on and find difficult to measure.
Dale said he’s “comfortable” with the committee’s central judgment that the amount of slack in the economy is about 1 percent to 1.5 percent of gross domestic product. He said any “significant differences of view” would have been “reflected very clearly” in minutes of the February meeting. The document summed up discussion on the BOE’s overhaul of forward guidance in a single paragraph with no suggestion of disagreement.
“Even though they’re all signing up to that same broad framework, different people’s policy decisions are quite likely over the next couple of years to vary,” he said. “I would expect us to go back for dissent to being a normal thing.”
The BOE refined its forward-guidance policy this month to bolster officials’ message on loose policy as the economy recovers. The changes were published in the BOE’s latest Inflation Report, which it has revamped in the wake of the 2012 Stockton Review into its forecasting record.
That study found that central bank staff should be encouraged to be “more assertive” to challenge the institution’s “house view,” a conclusion interpreted at the time by some lawmakers as criticism of so-called groupthink.
Since Carney’s arrival, the MPC has voted almost in unison on forward guidance and keeping policy on hold, with a sole dissent in August when Martin Weale differed on the terms under which guidance would become invalid.
“I’ve seen some newspaper reports somehow suggesting the committee is behaving differently now, and somehow it’s not acting so independently and we’re not having as much dissent,” Dale said. “That’s totally and utterly untrue. That process of active robust challenge and debate within the MPC hasn’t changed at all and it’s absolutely critical it doesn’t.”
Dale said the most significant change introduced in response to Stockton was the publication of more details on underlying judgments in the BOE’s forecasts and instituting a process to allow staff to challenge senior officials.
“Smart transparency is about saying that more and more information isn’t always the right thing,” he said. “It’s trying to help you better understand the essence of why the forecast looks like it does, or why the MPC is likely to behave like it does. That’s why those key judgments are really important.”
The chief economist said the new processes are aimed at creating more accurate forecasts, and the additional detail will allow people to understand the MPC’s projections and better analyse any errors, he said.
“Those changes amount to the biggest change in transparency of monetary policy for over 20 years,” Dale said. “People can now hold us to account in real time, to be able to say this or that judgment, I don’t think is right, and if we did this it would have a major impact.”
The chief economist said there were no plans for the central bank to introduce an independent staff forecast, something the Stockton report had recommended.
“Never say never, but at the moment we are trying to find ways in which the staff can more actively challenge and say their views in more efficient ways than actually than producing a whole separate forecast,” he said.
While the BOE had largely completed the actions pledged in response to the Stockton report, Dale said the central bank’s move toward greater transparency was not at an end.
“This is a part of an ongoing process,” he said. “In terms of Stockton, forward guidance, Mark Carney, all of these have been pushing in the same direction. Guidance has really complemented that general push.”
Dale said that the sharp fall in unemployment in recent months mean the outlook for interest rates has changed since guidance was introduced in August.
“What we’ve been very clear about is, we think there’s scope to absorb more spare capacity before we need to start raising interest rates,” he said. “But the fact that there’s less spare capacity now than there was a year ago means, other things equal, it’s more likely that interest rates are likely to rise sooner than that had not been the case.”
Dale said that the enhanced forward guidance unveiled this month is intended to show how officials reckon policy will look as they exit emergency stimulus, and suggested the framework may endure.
“That broad guidance should last for some period of time,” he said. “A key point of this forward guidance is not just to focus on when interest rates will rise, but what the path of interest rates will look like as we begin to raise.”
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