Investor bets for the Bank of England’s key rate to increase next year from a record low are reasonable, Bank of England Chief Economist Spencer Dale said.
The market forecasts interest rates “remaining on hold until about the Spring of next year and then rising to around 2 percent by the end of 2016 and on that forecast, on that basis, we have a forecast in which the economy looks pretty good,” Dale said in a BBC Radio 5 interview today. “Based on what we know now, that profile for interest rates looks reasonable.”
Dale spoke a day after BOE Governor Mark Carney presented new quarterly forecasts and a revision to the bank’s forward-guidance policy, replacing an unemployment threshold with a range of economic indicators. Carney said yesterday borrowing costs will need to remain at 0.5 percent for some time to safeguard the recovery.
A pledge for borrowing costs to move as investors predict “can’t be a promise” because officials set policy based on their assessment of the recovery’s progress, Dale said. While recent history shows the BOE “can’t forecast the economy really well,” spare capacity in the labor market suggests that rates need to stay low for some time, he said.
Once the bank starts raising rates, it will do so “gradually,” Dale said. At that point, it will start selling gilts it acquired through its 375 billion-pound ($623 billion) quantitative-easing program, and that will precipitate a decline in government debt prices.
“When you start raising interest rates, rates on all instruments rise, and as you say, the price of government bonds will fall at that point,” Dale said. Bond sales will be done “carefully, in such a way so as not to disrupt the economy or to disrupt the financial markets, but we will gradually withdraw that quantitative easing as we get back to more normal conditions,” he said.
The London-based central bank increased its growth forecasts yesterday and now sees expansion of 3.4 percent this year. Carney said the bank would continue providing emergency stimulus until all the spare capacity in the economy had been used up, changing guidance from a pledge for no rate increase at least until unemployment drops to 7 percent.
The pound jumped versus the dollar yesterday and short-sterling futures contracts slid as investors bet the BOE will struggle to hold down interest rates as the economy improves.
Dale today echoed Carney’s remarks that the Monetary Policy Committee “won’t take risks with the recovery” while the U.K. will see continued strong growth this year. He said in a separate interview with BBC Radio 4 that the “essence” of forward guidance hadn’t changed.