Bank of England's McCafferty Sees Risks From Delaying Rate Riseby and
MPC's voting differences are `of degree rather than kind'
Little evidence of risks producing material change in outlook
Ian McCafferty said global threats to the U.K. economy simply add to the risks affecting its outlook and don’t change his view that a Bank of England interest-rate increase is needed sooner rather than later.
"Clearly there are greater risks out there,” the Monetary Policy Committee member said in an interview on Bloomberg Television. “The question is the judgment as to whether these affect the central outlook for the U.K. economy or whether they simply compound some of the downside risks, and therefore any skew, on the outlook. My view at the moment is that, if anything, it compounds the downside risks.”
McCafferty has voted to increase the BOE’s key rate from a record low for the past three months and stands alone in his dissent, with the other eight members of the panel seeking to keep the benchmark at 0.5 percent. He signaled that any threats to the U.K. remain contained for now and that he’s comfortable with his stance.
“For those risks to crystallize into a material change in the U.K. outlook, those have to be transmitted into the U.K. economy, and that’s more likely through financial channels and through confidence channels than it is through the direct trade channels," McCafferty said. “As yet, there is little evidence that that is happening.”
McCafferty suggested that, despite the split on the MPC, there isn’t such a large difference in its range of views.
“Voting is by definition a very sort of binary issue,” he said. “Once you have to vote, that actually cements you into what outsiders see as a camp. But I think there’s a good deal of discussion and a good deal of agreement on all sorts of things on the MPC. The differences are that of degree rather than kind."
Questioned on how investors have changed expectations toward the U.K. since August, he said that markets have reacted “very strongly.” Forward contracts based on the sterling overnight index average, or Sonia, suggested that a full 25 basis-point increase in the BOE’s key rate won’t come until after December 2016. That compares with September 2016 as seen at the end of August.
Balance of Risks
In a speech delivered earlier on Tuesday at Bloomberg LP’s European headquarters in London, McCafferty said the BOE needs to avoid getting “behind the curve,” and must ensure borrowing costs can rise without disruption to companies and households. “That provides an additional justification not to leave the start date for lift-off too late,” he said.
While some of the issues currently buffeting the U.K. economy, including the fiscal squeeze and weak international growth, will continue “for some time to come,” other headwinds will dissipate, he said.
His vote for an increase reflects “the balance of risks around inflation by 2017,” he said.