Dale Says BOE Will Only Raise Rates When Recovery Strong Enough

Bank of England Chief Economist Spencer Dale said policy makers will keep interest rates at a record low until there is a sustained period of strong growth, as he reinforced the bank’s guidance message.

“We will tighten policy only when we are well along the road to recovery,” Dale said in the text of a speech delivered today at a Confederation of British Industry East of England event in Newmarket. “Yes: interest rates will rise at some point. But only against a far stronger economic backdrop.”

Dale’s comments echo those of Governor Mark Carney earlier this week, when he told an audience in New York he wants to avoid a premature withdrawal of stimulus. Dale also said policy makers must demonstrate their commitment to the central bank’s inflation target and he noted the potential risks to the economy from the revival in the property market.

“Anyone with more than a passing interest in British economic history is aware that the U.K. housing market has a sort of microwave-type quality to it, with a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds,” Dale said. “The bank is fully aware of this risk. The good news, however, is that it’s far better equipped to respond to these types of risks than in the past.”

Recovery Durability

Dale said there’s been a “marked improvement” in access to credit in the past 18 months as the euro-area crisis eased and U.K. government policies gained traction. These include the Funding for Lending Scheme and the Help to Buy program to aid first-time property buyers.

“A healthy housing market is good for our economy,” he said. “More importantly, it will underpin further increases in housebuilding, which has played an important role in driving the economic growth we’ve enjoyed this year and which, as a nation, we need to see.”

Dale said the recovery so far has been led by households and its durability “will depend on the baton of growth being handed over to the corporate sector, whose spending and investment will help to foster stronger growth in productivity and real incomes.”

The BOE’s forward guidance is subject to three conditions, two of which are linked to inflation. Under the plan, the Monetary Policy Committee has said it won’t consider raising its key interest rate from 0.5 percent at least until unemployment, now at 7.6 percent, drops to 7 percent.

Dale said that while consumer-price growth has cooled this year and is close to the BOE’s 2 percent goal, “this isn’t a time for complacency.” Inflation has been above target since late 2009.

“We have also needed to trade off the speed with which we bring inflation back to target against the support that monetary policy can provide,” Dale said. “The MPC is fully aware that extraordinary low interest rates are likely to be needed for some time yet. But when they cease to be, this will be a sign that we have finally turned the corner for home.”

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