BOE’s Dale Signals Gradual Rate Increases Over Two Years in FT Interview
“I’m not at all confident that the recovery has taken hold and will definitely power away,” Dale said in an interview with the Financial Times published today in London. “However, I’m even more worried about what’s going on in terms of inflation.”
Inflation accelerated to 4.5 percent in April, the fastest since 2008, forcing Bank of England Governor Mervyn King to explain publicly why officials have yet to raise borrowing costs from a record low of 0.5 percent. Dale has voted for interest- rate increases since February and helped compile forecasts this month using investor expectations that showed the benchmark will rise once this year and reach 3 percent in 2014.
“That sort of broad path” for rates “didn’t look wholly improbable,” he said. Still, “what we know is things will change and the economy will evolve differently” and “as a result the interest-rate path will differ as well.” A Bank of England spokeswoman confirmed Dale’s comments and said he wasn’t making forecasts for rates.
Dale began calling for higher interest rates after the bank completed its first quarterly predictions of the year in February, joining Andrew Sentance and Martin Weale. Data since those forecasts has showed inflation continuing to accelerate, while the economy stagnated in the past two quarters.
“I’m not particularly happy about voting to raise interest rates and doing it for nasty reasons” of curbing inflation rather than economic growth, Dale said. The nine-member panel has kept the rate unchanged for more than two years.
Dale said he remains “cautious about the degree” that the bank should raise the benchmark, in part because of the impact on borrowers.
“I don’t take lightly the impact this could have on some families,” he said. “But I think the cost to our economy as a whole -- were inflation to persist for longer and our credibility start to be eroded -- would be even worse.”
Dale highlighted the bank’s May economic forecasts, which showed inflation will exceed the 2 percent goal until the start of 2013. That implies an overshoot of the target during “the best part of seven years,” he said.
Such a deviation may make people feel it is reasonable to ask if the bank is “just as aggressive in getting inflation back to target as it used to be, or is there a risk that it has become a little bit more tolerant,” he said.
Dale’s comments signal more alarm on the threat from persisting inflation than those this week of his line manager, Deputy Governor Charles Bean, who still favored unchanged rates this month. Bean said that allowing a “temporary” period of above-target inflation is consistent with the bank’s mandate and is necessary to support the economic recovery.
“The Monetary Policy Committee’s chosen approach has been to accept a temporary period of above-target inflation, rather than seeking to hold inflation as close to the 2 percent target as possible at all times,” Bean said.
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