interest rate rise

The Bank of England might need to raise British interest rates somewhat sooner than Deputy Governor Dave Ramsden had expected if wage growth picks up early this year, according to a newspaper interview released on Saturday.

Ramsden was one of two policymakers who opposed the BoE’s decision in November to raise interest rates for the first time in a decade, but appears to have shifted his stance somewhat in comments published by the Sunday Times newspaper.

Earlier this month the central bank said interest rates might need to rise somewhat sooner and by somewhat more over the next three years than policymakers had expected in November, due to a strong global economy and signs wages are rising faster.

“We all will keep a close eye on what happens through the early part of this year to see if that (BoE) forecast of wage growth picking up to 3 percent is realised,” Ramsden was quoted as saying by the Sunday Times.

“But certainly relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later.”

RATE RISES EXPECTED

Economists polled by Reuters expect the BoE to raise interest rates to 0.75 percent from 0.5 percent by May, and financial markets price in a high chance of a further rate rise to 1 percent before the end of 2018.

The BoE’s chief economist, Andy Haldane, told lawmakers on Wednesday that he thought interest rates might need to rise slightly faster even than the central bank had expected when it set out fresh economic forecasts early in the month.

However, Governor Mark Carney said at the same event that future monetary policy decisions would depend heavily on how businesses and consumers react to ongoing talks on the terms of Britain’s departure from the European Union in March 2019.

Britain’s economy underperformed other major advanced economies last year, due to a hit to consumer demand from higher inflation triggered by the pound’s fall after the Brexit vote, as well as comparatively weak business investment.

The unemployment rate also rose slightly in the final quarter of 2017, though at 4.4 percent it remains near a 42-year low.

Ramsden told the Confederation of British Industry on Friday that the economy could not grow faster than 1.5 percent a year without starting to add to inflation pressures.

Source: UK Reuters

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