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Super Thursday: U.K. Needs to Kick ‘Monetary Medicine’ Habit, ex-BOE Official Says

Sushil Wadhwani on inflation, China and how he'll tackle Super Thursday

The Bank of England is preparing a huge presentation of data this week — dubbed Super Thursday – as well as getting ready for an increase in interest rates.

Sushil Wadhwani, a former external member of the Bank of England's Monetary Policy Committee, told Bloomberg Brief's Alex Brittain and Bloomberg First Word's Deborah Hyde he predicts the bank will begin tightening in the autumn. "I think we'll know a lot more about China in three months' time. I don't think the costs of waiting three months are that great. November is an obvious time to look at this because we'll know a lot more."

He also addressed the prospect of a hard landing in China and how that might affect the move towards a rate increase. 

Wadhwani had just spoken at an event in London hosted by Fathom Consulting.

When is inflation going to be a policy-relevant number again?

You'll have to tell me when commodity prices are going to move steadily rather than these big downward lurches, and before that, big upward lurches. If we get a period of stability both in commodity prices and the currency, then headline inflation will recouple with domestically generated inflation.

A hard landing in China could prevent stable commodity prices, though.

Yes. That is the key risk. And it would do much more than that because not only would you get very weak headline inflation but it would have very meaningful ramifications for both exports and investment in this country. It would deter a lot of investment.

This is an unusually difficult time for the BOE to start a policy shift given that, the Fed outlook and European weakness, isn't it?

But remember we're starting off with an emergency level of rates. I think if we get to November and find that, actually, China isn't as bad as we're all fearing at the moment, things are vaguely stabilizing there, and wages are continuing to edge up here, and productivity isn't following  suit — then I think we can make a very reasonable case that the U.K. economy doesn’t need this emergency level of support to the same extent.

Where rates are, combined with the amount of QE we've done — this is extreme monetary medicine. My fear is that if you don't take it back after what's been a relatively benign period for the U.K. economy, then the next time we need it we won't have  any ammo.

How soon might the downturn in the business cycle start?

This has been a very unusual cycle. Neither in the U.K. nor the U.S. have we reached the sort of extremes that precede a downturn. Remember we're just getting back to full employment. No sign of overheating in either economy. So hopefully the cycle will last quite a bit longer than normal.

Hopefully.

Hopefully! You never know because some cycles die through an aggressive central bank. But some cycles die just through an exogenous event.

Do you see any parallels between now and the dot-com boom?

There are small pockets of the financial markets which are clearly at somewhat racy levels. But it doesn't remotely approach the degree of overvaluation we saw in 1999, early 2000. If you look at the multiples that prevailed then in the market generally — obviously the new-economy stocks were at very extreme levels — but if you look at the multiples on the Nasdaq then, it was so much higher than where we are at now. I don't think you can compare the two episodes. That was really extreme levels of valuation.

Is that the same for the for house prices in the U.K.?

The thing to remember about the U.K. is you've got at least two different property markets. Prime central London, which is a kind of law unto itself, and then the rest of the country. If you look at the rest of the U.K. market, yes it is stretched relative to history, but that's because interest rates are so low.

What will you be looking at first on Super Thursday?

I will read the concluding section of the minutes first, then I will read the summary of the Inflation Report, and the projections. In that sequence.

Is the three-year ahead inflation forecast where you'll be most focused?

I think the three-year is where you get the signal. Two-year is where you know whether it's urgent or not.

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This article was amended to use the correct name for Fathom Consulting.

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