Bank of England Chief Economist Spencer Dale said policy tightening will probably be slower than after previous recessions and investors may have failed to heed the message of policy makers’ forward guidance.
“If the financial markets are pricing in a sharp rise because they think in the past, every time the economy’s growing quickly the bank’s raised interest rates, I think they should think again,” Dale said at an event in London yesterday. “Our forward guidance says clearly that’s not the case.”
BOE Governor Mark Carney introduced guidance in August, saying policy makers will keep the key interest rate at a record low of 0.5 percent at least until unemployment, now at 7.7 percent, drops to 7 percent. While the central bank forecasts that the threshold won’t be reached until late 2016, investors are betting on a rate increase before then.
Dale also said investors are wrong to link the current policy outlook in the U.K. with that of the U.S. Federal Reserve just because they have “synchronized” in the past.
“The U.S. is about two to three years ahead of us in terms of the state of their recovery,” he said at the event, hosted by the Milken Institute.
Dale said the BOE’s guidance structure reflects uncertainty on the Monetary Policy Committee on the path of recovery and a “best guess that it’s as likely as not” to reach the threshold before the end of 2016.
“What the MPC has said is we don’t know how quickly and the extent to which productivity will come back, so we’re relatively uncertain about how long interest rates will be kept low,” he said. “For that reason I don’t know how big the implicit effective output gap is. By feeding off of unemployment I can remain agnostic.”