Tags: BOE | rates | economic | recovery

Bank of England Will Raise Rates Only After Recovery Secure

Sunday, 20 Oct 2013 12:51 PM

 

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Bank of England policymaker Ben Broadbent said officials will only consider an interest rate increase once the recovery is secure, with inflation unlikely to prompt monetary tightening earlier than they have signaled.

“We want to ensure that this recovery, which is only just beginning in a way, continues and is not choked off by a premature rise in interest rates,” Broadbent said in a television interview on Sky News today.

BOE Governor Mark Carney introduced forward guidance in August, saying policy makers will keep the key interest rate at a record low 0.5 percent at least until unemployment, now at 7.7 percent, drops to 7 percent. While officials forecast that won’t happen before 2016, investors are betting on a rate increase before then as one of the policy’s inflation-linked clauses is triggered or joblessness declines faster than the monetary authority predicts.

It’s “unlikely” that one of the inflation knockouts will be breached, Broadbent said. “It’s more likely that we would only consider raising interest rates once unemployment falls below 7 percent.”

The aim of guidance is to give more information on the conditions under which the BOE would think about raising interest rates, Broadbent said. “The purpose is to reassure people that we’re only going to do that when the recovery is on a secure footing.”

Economic Recovery

The U.K. economic recovery has gained momentum this year and the International Monetary Fund this month raised its growth forecast for the country.

Data this week will show U.K. economic expansion accelerated to 0.8 percent in the third quarter after 0.7 percent growth in the three months through June, according to the median forecast of 40 economists in a Bloomberg News survey. The number will be released by the Office for National Statistics on Oct. 25.

In an interview published in the Sunday Telegraph today, former BOE Deputy Governor Paul Tucker said the impact of the central bank’s stimulus had increased as concerns spurred by the euro-area sovereign debt crisis eased.

It was too early to say whether the U.K. economy had achieved “escape velocity” and forward guidance means BOE policy makers “won’t commit to exit prematurely when there’s still slack in the economy,” Tucker was cited as saying by the newspaper.

Tucker, who left the BOE on Oct. 18, will be replaced by Jon Cunliffe next month.

Sustained Growth

“We’re only going to start considering raising rates when we see a sustained period of strong growth, rising real incomes, and falling unemployment, unless that causes any risk with financial stability or price stability,” BOE Chief Economist Spencer Dale said in a video interview on the BBC’s website on Oct. 18. “My best guess is I don’t think it’s likely to happen next year. I think we’re talking definitely years rather than months.”

With his Conservative Party lagging in opinion polls, Prime Minister David Cameron is counting on the economy continuing to pick up pace and a more buoyant housing market to help him retain power at the next general election in May 2015. This month, he accelerated a plan to boost mortgage lending, prompting comments from the IMF that the move may stoke a housing bubble.

Narrowing Lead

The Conservatives narrowed the opposition Labour Party’s lead in October to its smallest level in 19 months, according to a ComRes survey commissioned by the Independent on Sunday and Sunday Mirror newspapers and published today. Support for Labour fell one percentage point to 35 percent from last month, while the Conservatives saw a four-point gain to 32 percent, ComRes said. That’s the smallest gap since March 2012.

ComRes, which interviewed 2,001 Britons Oct. 16-18 for the poll, didn’t give a margin of error.

“The housing market has been sort of frozen for several years and we’re starting to see that thaw,” Dale told the BBC. “A healthy housing market is good for the U.K. economy. We’re aware that it could over time start to overheat and we’re watching that very carefully, but that’s not where it is at the moment.”

BOE officials have said that mortgage borrowers must make sure they can still afford repayments when borrowing costs rise.

“Although interest rates will at some point start to rise, it’s worth remembering quite how low a level we’re starting from,” Broadbent said. “I think there’s a fair amount they could go up before borrowers got into great difficulty.”

Banker Bonuses

On changes to bankers’ bonuses, Tucker told the Telegraph that the focus should be about the structure of remuneration rather than the level, and they should be “paid partly in bonds that can be written down or become worthless if their bank went into liquidation,” the newspaper reported. The former deputy governor also said that while the culture in banking “has started to be fixed,” it is “a long road,” the Telegraph reported.

A major U.S. bank could collapse today without requiring taxpayers’ money and the U.K. is just “a year or so behind,” Tucker was cited as saying.

© Copyright 2014 Bloomberg News. All rights reserved.

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