BOE’s Haldane Sees Case for Raising Interest Rates This YearBy
Says overall economic picture is a ‘reasonably reassuring one’
Comments in speech in Bradford, England, given Tuesday
Bank of England chief economist Andy Haldane is leaning toward joining the hawks on the Monetary Policy Committee, saying that the risks of leaving policy tightening too late are rising and that he considered a vote for a rate increase as early as June.
“The risks of tightening ‘too early’ have shrunk as growth and, to lesser extent, inflation have shown greater resilience than expected,” Haldane said in a speech published Wednesday. “Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.”
The comments from Haldane, usually on the more dovish end of the panel, add to signs that policy makers are becoming increasingly restless as inflation breaches their 2 percent target. Kristin Forbes, who is leaving the bank at the end of the month, told Bloomberg Monday that inflation driven by the fall in the pound since the referendum cannot be ignored, and that there is a cost to waiting to raise rates.
The pound advanced after the comments were released, and was up 0.5 percent to $1.2691 as of 12:03 p.m. London time.
Haldane said the overall economic picture “is a reasonably reassuring one” in the speech, which he delivered on Tuesday. “If policy is tightened ‘too late,’ this could result in a much steeper path of rate rises later on, contrary to the MPC’s collective expectation that bank rate would increase ‘at a gradual pace and to a limited extent.’”
The MPC voted 5-3 to keep interest rates on hold this month, though the committee as a whole noted that their “tolerance of above-target inflation” was being tested.
Inflation now stands at 2.9 percent, and while the economy slowed to 0.2 percent in the first quarter, it has performed much better than expected since the U.K. voted to leave the EU last year. One remaining puzzle for policy makers is why wages aren’t increasing, even with rising price growth and unemployment at its lowest rate since 1975.
Flexible hours, self-employment and zero-hours contracts are some of the trends that could be suppressing wages, Haldane said. “Recent trends in the nature of work may have had some bearing both on wage-setting behavior in general and on the weak wage puzzle in particular,” he said. Nevertheless, there’s evidence elsewhere of domestically generated inflation.
Haldane still acknowledged the challenges facing the economy that “until recently” supported his view of maintaining supportive monetary policy, including rising inflation, damping households’ purchasing power, and the possibility of Brexit negotiations going awry. He also noted that the BOE’s latest forecasts, published in May, rely on the “strong assumption” that the Brexit process will be smooth and orderly.
“A number of market participants and external commentators believe there is a risk Brexit will be neither smooth nor orderly,” he said. “That could prompt a discontinuous response by consumers and companies” and “there could be a ‘Brexit break’ in the economy,” he said.
That possibility is at the front of Governor Mark Carney’s thinking, who in a speech this week highlighted the risks to consumer spending, business investment, the current-account deficit and financial services emanating from Brexit. The U.K. government started formal divorce talks this week, and are off to a slightly rocky start. Carney said he wants to see how the economy responds to the “reality of Brexit negotiations.”