BOE Won't Move Ahead of the Fed, Former U.K. Officials Say

  • Goodhart says Federal Reserve uncertainty damaging credibility
  • Barker says U.K. growth suggests rate normalization needed

Former Bank of England policy makers Charles Goodhart, Willem Buiter and Kate Barker said the U.K. will probably wait for the Federal Reserve to move first before raising interest rates.

“I’ve always thought the best way to forecast the U.K. is to look at the U.S. and then add six months,” Goodhart said in an interview on Bloomberg Television. “Assuming they do go up in December, then you’re somewhere between February and May for the U.K.”

The Fed’s decision not to raise rates this month has thrown doubt on the timing of the first BOE move since both central banks are dealing with the same curve ball: China’s slowdown. U.K. investors are now pricing in an quarter-point increase in the benchmark rate in November 2016, compared with an August expectation before the Fed’s Sept. 17 announcement.

The three economists’ remarks contrast with comments made by sitting policy makers such as David Miles, who has refuted the idea that the U.K. needs to time its policy according to other central banks’ actions. He made the remark before stepping down at the end of August. Governor Mark Carney said last week the timing for the BOE’s decision is likely to be clearer around the turn of the year, and continued gains in wage growth and core inflation mean that “it may be appropriate to begin to withdraw stimulus.”

Paving the Way

The Fed may yet pave the way for the BOE this year. Chair Janet Yellen said Thursday she’s ready to raise borrowing costs in 2015.

“If the Fed doesn’t move, it’ll make it a little bit more difficult for the bank to move,” and Yellen’s speech makes a U.S. increase more likely, Barker said in a Bloomberg Television interview. In the U.K., growth “is reasonably satisfactory. In these circumstances maybe we should be thinking about moving toward a normalization of interest rates.”

Goodhart, now a professor at the London School of Economics, said doubt about when the Fed might start raising rates is “damaging” and uncertainty is not a reason to delay normalization. He said if he’d been a U.S. policy maker he would have tightened rates.

12.5 Points

“I would have voted for raising not by 25 basis points but by 12.5 basis points,” he said. This “would have gotten around this uncertainty about ‘Will they, won’t they, when will they start?’ At the same time, raising rates by that much less would have given a straightforward indication that the path would be much more gradual and the peak would be rather less.”

Buiter, now chief economist at Citigroup Inc., said the U.S. will act first, and for both banks the pace will be slow.

“When they start moving, they will move very slowly and gradually and not to a very high level,” Buiter said in a television interview. There won’t be a U.K. move soon, “because while earnings are growing a bit faster, unit labor costs are still very tame because productivity is finally crawling out of the bushes after it’s been hiding for years.”

All three former BOE officials spoke while attending the MMF U.K. Monetary and Financial Policy Conference at Bloomberg’s office in London on Friday.

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