BOE’s Miles Saw Reasonable Case to Raise U.K. Rate Last Week

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David Miles
Bank of England Monetary Policy Committee member David Miles poses for a photograph following an interview in London, on Monday, Aug. 10. Photographer: Simon Dawson/Bloomberg

David Miles said there was a “reasonable” argument for the Bank of England to raise interest rates at its meeting last week in order to avoid faster tightening in future.

“I thought there was a case for beginning the journey now,” the BOE policy maker said in an interview in London on Monday as he explained how close he came to voting for higher borrowing costs at his final meeting on the Monetary Policy Committee. “It was a perfectly reasonable case.”

In the end, only one of the nine-member MPC, Ian McCafferty, wanted to increase the benchmark interest rate from a record-low 0.5 percent even as the panel projected above-target inflation in three years. Most economists had anticipated that at least one other official would push for tightening.

“Sterling had gone up a bit, oil prices had fallen a bit, there were somewhat ambiguous signals from the labor market, but on balance it was a set of economic news that probably reduced at least the near-term inflation profile by a non-trivial amount,” Miles said. “For me that was what made the decision ultimately one to keep policy on hold.”

He suggested that the decision wasn’t an easy one.

“Ian McCafferty came out on one side of that and I was on the other side, but it wasn’t a compelling clear-cut case one way or the other for me,” Miles said.

‘Perfectly Reasonable’

“It may be the feeling of several other members that they also thought there wasn’t a compelling case but the arguments were perfectly reasonable,” said Philip Shaw, chief economist at Investec Securities in London. “It does suggest that the committee as a whole could well be placing a fair amount of weight on trends in unemployment over the coming months.”

Data on Wednesday will probably show that both the unemployment rate and wage growth excluding bonuses were unchanged in the second quarter from the three months through May, according to economist estimates. Both increased in the latter period, creating a mixed picture for policy makers.

Miles, who joined the MPC in 2009 and is also a professor of financial economics at Imperial College Business School in London, will leave the committee on Aug. 31, to be replaced by Brevan Howard Asset Management economist Gertjan Vlieghe.

Inflation Outlook

The policy maker, speaking in his office at the BOE, said the date of the first interest-rate increase is less significant than the overall path of borrowing costs. It’s likely that in two to three years’ time, inflation will be around the 2 percent target, spare capacity will be “all but gone,” and the economy will be growing at 2.5 percent to 3 percent a year over that time, he said.

“You might consider that an environment in which monetary policy might move back to a more neutral level,” Miles said.

“Supposing you thought that where you might want to get to, 2 1/2 to three years down the road, is 2.5 to 3 percent on interest rates, so you need 200 to 250 basis points of increases in rates, and you wanted to grow gradually,” he said. “That’s quite consistent with not immediately increasing interest rates, but at the same time you wouldn’t expect to be waiting around many, many months and well into next year before you started this journey.”

Miles cautioned that delaying an increase might require faster tightening.

“The longer you leave it, the slightly more steep that trajectory becomes,” he said.

The outgoing MPC member, who now plans to refocus on his academic work at Imperial, offered one tip for his successor.

“Enjoy the wonderful tranquility of meetings when nobody has a Blackberry,” Miles said, reffering to the MPC’s main policy gatherings. “In the meetings it’s a blissfully Blackberry-free few hours. It’s wonderful.”

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