Bank of England Deputy Governor Charlie Bean said the first interest-rate increase from the current record low will indicate the economy is returning to normal.
An increase “will be a symbolic step, because it will be an indication that we are on the road back to normality,” Bean, who oversees monetary policy at the central bank and will retire on June 30, told the Sunday Times in an interview. “I would welcome us getting on to the path of normalization, as a demonstration that the economy is healing,” he added.
BOE Governor Mark Carney said June 12 a rate increase may come sooner than investors expect, though he cautioned that rising mortgage debt may threaten the recovery. The central bank’s Monetary Policy Committee cut the key rate to 0.5 percent in March 2009. Under Carney’s forward guidance policy officials had pledged no change until slack had been used up.
“The economy is not in an emergency state,” Daniel Vernazza, an economist at UniCredit Bank AG, said in a research note. “To deal with adverse shocks -- which will inevitably come -- it’s important to start normalizing the bank rate.”
Following Carney’s remarks, investors revised their bets on the first rate increase, pricing in a move by January compared with previous bets for May, Sonia contracts showed.
Bean told the Sunday Times he was “optimistic” as the economy was showing “better balance” toward investment.
“This is a recovery that has legs,” he said. “There are still risks but there are plenty of reasons to be cheerful.”
U.K. gross domestic product expanded 0.8 percent in the first quarter and is on track to be the fastest-growing among the Group of Seven nations this year. While Chancellor of the Exchequer George Osborne’s Conservative Party is gaining ground, it still hasn’t pulled ahead of the opposition Labour Party in voter opinion polls.
Labour’s lead over the Tories narrowed 2 points in a ComRes poll conducted June 11-13 for the Independent on Sunday, the smallest margin in more than two years. Labour stood at 34 percent, up one point from May, while the Conservatives rose 3 points to 32 percent. A margin of error wasn’t given.
Bean’s newspaper comments come as the BOE contends with pressure to act on housing from groups such as the Organization for Economic Cooperation and Development. Osborne last week gave the BOE’s Financial Policy Committee new powers to curb mortgage lending.
Average U.K. house prices rose 3.9 percent in May to a six-year high of 184,464 pounds ($313,000), Lloyds Banking Group Plc’s Halifax division said June 5. Still, there are divisions across the country, and government data show annual price growth in London was 17 percent in March compared with 8 percent for the whole country.
Bean said that any action on the housing market by the FPC should be viewed as preventing future problems.
Carney said last week the FPC can use its macroprudential tools to defend Britain’s financial stability from risks posed by a surging housing market. He said those tools will enable the bank to leave the key interest rate at a record low to cement the recovery.
“I see what the FPC could do as insurance against problems that might build, rather than that we have already let the genie out of the bottle,” said Bean, whose Sunday Times comments were confirmed by a Bank of England spokeswoman. Bean is also a member of the FPC, which next meets on June 17.
Bean told the newspaper a higher interest rate “would not have made much difference” in addressing the build-up of problems from sources such as the U.S. housing market, cumulating in the financial crisis.
“The real moral of the story is that you need to use other tools to address financial imbalances, and that those tools need to be your first line of defense,” he said.
To contact the reporter on this story: Jennifer Ryan in London at firstname.lastname@example.org