The Bank of England could end up needing to raise interest rates faster than investors expect, its chief economist told lawmakers on Wednesday, striking a slightly more hawkish tone than his central bank colleagues.
BoE Governor Mark Carney, appearing alongside Haldane, said there was no need to give a direct commitment on rates as markets broadly understood the BoE’s message – unlike in the months before November’s rate rise, the first in over a decade.
Britain is growing more slowly than other rich economies but is benefiting from a global upturn. Unemployment is close to a 40-year low, bringing higher rates back on the agenda despite the uncertainty for business about the shape of future trade ties with the European Union after Brexit next year.
The BoE said earlier this month it expected to raise rates sooner and by more than it had expected as recently as November.
Most economists now expect the BoE to raise rates to 0.75 percent in May, and financial markets see a roughly 70 percent chance of a further rise this year, taking rates to 1 percent.
Haldane, who sent an early signal last year that the BoE was heading for its first rate hike in over a decade, said growth was more likely to overshoot than undershoot the forecasts made by the BoE’s Monetary Policy Committee earlier this month.
That could require more tightening than the three rate hikes over three years which markets priced in at the time.
“I would judge the risks to the MPC’s latest projections, for both UK demand and inflation, as lying to the upside,” Haldane wrote in an annual report to parliament.
Both the world economy and Britain could do better, he said.
“In my view, this would put the balance of risks to the path of interest rates necessary to return inflation sustainably to target to the upside,” Haldane said.
Carney – who lawmakers have criticized for previous steers on rates that have not worked out – was more circumspect.
“Financial markets have started to move with the underlying data … so they’re better able to anticipate what we could do and … the need for direct almost pre-commitment of a raise goes away.”
NO HAND-BRAKE TURNS
Some BoE officials as recently as last year had emphasized the dangers of raising rates prematurely.
But Haldane took a different view. “Historically the thing that has really killed jobs has been central banks stepping on the brakes too late,” he told lawmakers of parliament’s Treasury Committee.
“We are absolutely clear we don’t want to be back there again because it’s bad news for jobs. And that means going in this limited and gradual way to head things off in advance, to prevent having to step on the brakes – a hand-brake turn.”
Asked about recent sharp moves in global financial markets triggered by concerns about central banks raising interest rates, Carney said the volatility was “small potatoes” and the most important factor for Britain remained the approach of Brexit and its effect on business and consumer confidence.
“Monetary policy is nimble. It will react to those expectations,” he said.
Haldane said if British economic growth held up at around the rates seen during 2017, and pay rises strengthened, then the case for higher rates was likely to be made.
Official data on Wednesday showed overall wage growth was stable in the three months to December but some economists said a month-by-month breakdown pointed to higher pay growth ahead.
Haldane said January 2018 data would probably show a marked pick-up in wage growth, which he expected would soon reach an annual rate of 3 percent.
Haldane also said sterling’s sharp fall after the Brexit vote in June 2016 had “worked its magic” in terms of boosting British exports.
But his Argentinean-born MPC colleague, Silvana Tenreyro, said her experience was that devaluations made people poorer, and Carney was quick to interject that weakening Britain’s currency was “not a good economic strategy”.
Source: UK Reuters