One-Time BOE Dove Sees Case for Imminent Rate Hike

Updated on
  • Policy maker joins Carney among majority seeing hike soon
  • Odds rise of U.K. tightening starting as early as November

Blanchflower Says a BOE Rate Rise Is 'Clearly Wrong'

Bank of England policy maker Gertjan Vlieghe, regarded as one of the more dovish members of the Monetary Policy Committee, said that he may support raising interest rates in the near future.

The pound extended its advance as he put himself among the majority of MPC members who this week said an increase in borrowing costs could be needed soon. The flip puts Vlieghe in the hawk camp with Governor Mark Carney and strengthens the chances of a hike as early as the next meeting in November.

Gertjan Vlieghe

Photographer: Chris Ratcliffe/Bloomberg

That means that after false dawns sparked by Carney in 2014 and 2015, the U.K. is heading for its first interest-rate increase in more than a decade. It also puts the BOE on the same trajectory as the Federal Reserve -- which is already tightening. The European Central Bank is also starting to consider how to wind down its stimulus measures.

In Vlieghe’s view, less economic slack, the lowest unemployment in more than four decades, indications of stronger consumption and nascent signs of faster wage growth mean that domestically generated inflation may be building. The BOE expects price growth to breach 3 percent -- a full point above its target.

“The evolution of the data is increasingly suggesting that we are approaching the moment when bank rate may need to rise,” Vlieghe said in a speech at the Society of Business Economists in London on Friday. If the economy continues apace, the appropriate time “might be as early as in the coming months.”

The revelation that the BOE is considering an imminent tightening shocked investors, prompting them to bring forward expectations of the next move. Deutsche Bank and Barclays were among the banks to change their predictions to forecast a hike in November.

The pound reached $1.3616 following Vlieghe’s remarks, the highest since just after the Brexit vote.

“You’ve got reasonable growth, you’ve got full employment, inflation above target. What’s a central bank going to do? They’re going to raise of course,” Paul Donovan, chief economist at UBS Wealth Management, said on Bloomberg Television on Friday.

The decision to leave the European Union is still a risk to the economy as it weighs on investment, Vlieghe said. That’s something the BOE also highlighted in its policy statement on Thursday, though the stronger hawkish rhetoric suggests that inflation is overtaking Brexit as the priority.

While consumer spending has been weak this year, the bank sees signs that it’s picking up this quarter. Wage growth has also strengthened, and annualized private-sector pay has averaged more than 3 percent in recent months.

“There remains a risk that, at some stage, the uncertainty surrounding the Brexit process has a larger impact on the economy than we have seen so far,” Vlieghe said. “If that happens, monetary policy would respond appropriately. But for now, it seems the net effect of the many underlying forces acting on the U.K. economy is that slack is continually being eroded and and wage pressure is gently building.”

— With assistance by Scott Hamilton

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