BOE Policy Tightening Better Late Than Premature, Vlieghe Says

  • Policy maker warns caution is warranted due to asymmetries
  • Says U.K. consumer slowdown is likely to intensify this year

When it comes to raising U.K. interest rates, it’s better to be late than early, according to Bank of England policy maker Gertjan Vlieghe.

With the benchmark rate at a record-low 0.25 percent and asset purchases “an imperfect substitute,” the BOE’s nine-member policy setting committee has less room to ease measures than to tighten, he said in a speech at Bloomberg’s European headquarters in London on Wednesday. He also warned that consumers -- so far the powerhouse of economic growth -- are starting to slow their spending and businesses could have a greater reaction to uncertainty as Britain moves closer to leaving the European Union.

“A rate hike that turns out to be premature is a more serious mistake than one that turns out to be somewhat late,” Vlieghe said. “Caution is warranted.”

BOE officials lowered the benchmark and expanded stimulus to bolster the economy in the wake of June’s Brexit vote, but since then the U.K. has proved more resilient than their forecasts. Fresh fuel was added to the debate last month over whether rates are too low when policy maker Kristin Forbes broke ranks to vote for a 25-basis point increase, and some others indicated that they may also be leaning that way.

Vlieghe indicated that, for now, he’s not one of them, although he remains alert to developments in wages and inflation expectations.

Spending, Credit

If “I see signs that inflationary pressures are spreading beyond just exchange-rate pass-through, or I see a re-acceleration of indicators related to household spending and credit, that would be my cue that a slightly higher level of bank rate is warranted,” he said.

Wages were one of the key factors in the outlook for policy. If persistently slower-than-expected pay growth over the past several years was caused by low inflation, then there may be a pickup in salary increases this year and next. However, if the source was greater slack in the labor market than policy makers believed, there might not be any significant earnings growth in the coming years, Vlieghe said.

Gertjan Vlieghe

Source: Bank of England

One sign that policy is too loose may be if strong credit growth continues, Vlieghe said. The central bank’s Financial Policy Committee warned last month that household indebtedness both “remains high by historical standards and has begun to rise relative to incomes.”

Vlieghe became the latest to weigh in on the debate about the value and accuracy of economic forecasting, pointing out that the BOE’s own predictions are as good as most other bodies and “also systematically better than guessing, or asking a chimp.” The economist, who holds a PhD from the London School of Economics, said he’s surprised at the current denigration of his profession.

“I have been quite puzzled by the repeated attacks on economic experts, forecasters and models, based on these relatively small forecast errors,” he said. “Dismissing experts in general, and attacking the expertise of the economics profession as a whole, is a worrying and dangerous development. We risk making counterproductive decisions if prevailing evidence is simply ignored.”

— With assistance by Scott Hamilton

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