BOE’s Miles Says Gradual Pace of Rate Increases Is ‘Crucial’

Bank of England policy maker David Miles comments on interest rates, the outlook for monetary policy, U.K. housing and the pound. These are selected remarks from an interview with Bloomberg News on Monday in London before his term on the Monetary Policy Committee ends on Aug. 31.

On why he didn’t vote to increase interest rates this month:

“There was a case for that and I thought it was a perfectly reasonable case. Ian McCafferty came down on one side of that argument, I came down on the other side. It wasn’t an absolutely clear and compelling case on one side or the other for me.

‘‘If I think about what had happened over the previous month that was news, I think on balance much of it was news that at least in the near term made the inflation profile a bit lower. Sterling had gone up a bit, oil prices had fallen a bit, there was 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. For me that was what made the decision ultimately one to keep policy on hold.’’

On the path of borrowing costs:

‘‘In the short term, my own view is the trajectory of policy is much, much more likely to be a sort of normalization in policy and bank rate gradually moving upwards.

‘‘In some ways the date at which you begin this journey back to a more normal monetary policy is not such a big deal really. What I mean by that is it’s the overall trajectory that matters.

‘‘If it’s the case that two and a bit years down the road unemployment is close to a sustainable level, spare capacity is pretty much gone, profit margins look about an equilibrium level, the economy’s been growing at pretty close to its long-run average rate for a while, you might consider that an environment in which monetary policy might move back to a more neutral level.

‘‘Then the question is, ‘What might that neutral level be?’ A few weeks ago I spelled out some rather rough and ready back of the envelope calculations which suggested to me that that number, what you might call a neutral monetary policy, might be somewhere in the range of perhaps as low as two and a bit to as high as 3 1/2 or so. I’d be surprised if that number were less than two, I’d be surprised if that number were more than four. I think it’s likely to be in the range of two and a bit to three and a bit.

‘‘If that’s how things were to evolve I think the strategy then is to think about a path that gets you from round about where we are now to that point along a trajectory which is gradual. I think gradual is crucial here because one of the things that’s happened many times in my life is that monetary policy has had to be tightened very sharply in a short period of time. That’s particularly difficult for the U.K., partly because of the structure of our mortgage market.

‘‘So those are the sort of considerations that have been playing in my mind over recent meetings as we get closer to the point at which I thought it was right to start this process.

‘‘Supposing you thought that where you might want to get to 2 1/2 to 3 years down the road is, let’s say, 2.5-3 percent on interest rates. So you need 200-250 basis points of increases in rates and you wanted to grow gradually. 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 because if that really was the endpoint, the longer you leave it, of course, the slightly more steep that trajectory becomes.’’

On Mark Carney’s July 16 speech in Lincoln, England:

‘‘The governor didn’t say ‘I’m about to start raising interest rates.’ He said for him it would come into sharper focus toward the end of the year. He clearly didn’t say he’d be voting for rate increases at the end of the year.

‘‘What I have said more recently is that I felt we are closer to the time at which it would be appropriate to start this process of normalization than at any time I’ve been on the committee and that date is getting closer.

On the pound:

‘‘The pound is relevant in the sense that since the previous meeting I think sterling had appreciated 3.5-4 percent -- something of that order -- and that does have a non-trivial impact on the profile for inflation over the next several quarters. So it’s certainly relevant to the decision about monetary policy given our target and where we’re trying to get to. A 3-3.5 percent change in sterling over the month is not trivial, but more than that really is that it came on the back of trade-weighted sterling having gradually increased over the last couple of years.”

On the U.K. housing market:

“Prices have been rising fairly steadily across much of the U.K. for the last several months. Transactions have picked up a bit. Interest amongst buyers seems to have picked up a bit.

‘‘Are there things to worry about on the overheating side? I’m not sure that the alarm bells are so clearly ringing in the U.K. We’ve seen the rate of increase of house prices across most of the U.K. at actually fairly moderate levels over the last few months.

‘‘A combination of the attention the FPC gives the issues and the Mortgage Market Review mean that I think the risks of people overextending themselves on what are currently very low interest rates -- but interest rates that are likely to go up -- I think the risk of all the playing out badly is much lower now than at any time in the past for the U.K.’’

On the MPC simultaneously publishing its monthly decision, vote, meeting minutes and quarterly Inflation Report:

‘‘It’s quite a useful thing to have done. There are obviously costs and benefits of doing it. It’s not a clear cut thing. It’s a slightly more pressing timetable when you’re trying to produce everything to announce at the same time. Not easy exactly getting that right, particularly in Inflation Report months. But I think the big advantage is that people get an explanation of the decision at the same time as they hear the result of the decision.

‘‘So I think on balance, this is an improvement.

‘‘Logistically, it’s quite a challenge. I have to say not so much for members of the Monetary Policy Committee but for the staff who work on helping us produce the Inflation Report and the minutes. I think they’ve done a very good job this first time round.

‘‘I don’t think anyone is going to get the full message in the first two minutes after the minutes are out there. They can see the vote immediately. But I think by the end of the day people who really want to understand what we’re doing have plenty of time to work out what it was we’ve done.”

On the introduction of transcripts of MPC meetings:

“I think it’s bedding down. I think it was Martin Weale that said a couple of months ago that he felt for him that it slightly made some of his comments a little more stilted than they otherwise would have been. I think that’s kind of natural the first time people are aware that there’s a tape and exactly what they say is going to appear with some time lag. My guess is that that will become less significant with time and people will become somewhat less stilted.”

On the unconventional measures central banks have taken since the financial crisis and his future research plans:

“There are some interesting questions there about the optimal size of a central bank’s balance sheet, about what level of reserves the commercial banks might want to hold at the central bank, and about what type of assets the central bank might want to hold against the reserves that the commercial banks would want to hold. I’m going to spend most of my time for the next few years anyway back in the academic world and I think there’s a rich set of questions there to explore.

‘‘I haven’t yet mapped out a research agenda of what it is that I’m going to do but they are questions of significant policy relevance and also questions where I think there is a bit of a gap in our intellectual understanding of what the right structure of a central bank’s balance sheet should be.

‘‘I think there’s a whole load of other issues which are quite tangential to monetary policy that I would be quite keen to spend some time thinking about. One of them is to do with aging and life expectancy and how a world in which people might expect to live close to 100 will be a very different world.

‘‘That’s a huge change in a few decades and that changes people’s decisions about most economic aspects of their life, about where you work, how long you might decide to spend in education, what’s your plan financially over your life, how much do you accumulate.”

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