Haldane Says Case for BOE Rate Increase Still Some Way Off

  • U.K. faces headwinds from subdued world growth, Haldane says
  • Comments follow Fed decision to hold rates amid global risks

The case for raising U.K. interest rates is "some way from being made," according to Bank of England Chief Economist Andy Haldane.

Downside risks to inflation include the slowdown in emerging markets and the rise in the pound’s exchange rate, Haldane said in a speech at the Portadown Chambers of Commerce in Northern Ireland. That’s a concern when core inflation is subdued and unit-wage cost growth is still a percentage point below the level needed to reach the central bank’s 2 percent inflation target.

"With subdued world growth and prices, and a sharp appreciation of sterling whose effects in lowering imported prices have yet to fully pass through, I am not as confident as I would like that one percentage point of additional pickup will be forthcoming over the next two years," Haldane said. "Against that backdrop, the case for raising U.K. interest rates in the current environment is, for me, some way from being made."

Haldane’s speech follows the Federal Reserve’s decision on Thursday to keep U.S. rates on hold, with Fed Chair Janet Yellen citing global deflationary headwinds emanating from emerging markets. Slowing demand from China, the world’s second-largest economy, is of particular concern after a market rout wiped $5 trillion in value off the nation’s stocks and a change in the country’s exchange-rate regime led to the biggest depreciation in the yuan in two decades.

Market Contagion

BOE models suggest a 1 percent fall in emerging-market growth could slow global and U.K. growth by about 0.5 percent over two years -- enough “to slow the ship but not sink it,” Haldane said. While it’s too early to say how potent the contagion will be, banks are potentially vulnerable, he said.

The risks to U.K. growth and inflation are “skewed squarely and significantly to the downside," Haldane said. "Were the downside risks I have discussed to materialize, there could be a need to loosen rather than to tighten the monetary reins as a next step to support U.K. growth and return inflation to target."

The pound pared gains after Haldane’s comments and was trading at $1.5635 as of 12:57 p.m. in London, up 0.3 percent from Thursday.

While data on Wednesday showed U.K. wage growth accelerating and unemployment falling, inflation at zero remains far below the BOE target. Haldane said that even as the U.K.’s recovery remains on track, there are “straws in the wind” to suggest slowing growth into the second half of the year.

Employment Slowdown

"Employment is softening, with a fall in employment in the second quarter and surveys suggesting slowing growth rates,” he said. “Surveys of output growth, in manufacturing, construction and possibly services, have also recently weakened."

Haldane’s comments contrast with those made by BOE Governor Mark Carney on Wednesday. Testifying in front of lawmakers, he said that conditions on when to raise the benchmark rate from 0.5 percent will become clearer around the turn of the year. If economic expansion is above trend, labor costs and wage growth continue to rise and core inflation accelerates, “then the decision comes into much sharper relief and it may be appropriate to begin withdraw stimulus at that point,” he said.

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