The Bank of England’s newest policymaker Gertjan Vlieghe said on Monday he would take a “patient” approach to raising interest rates and there was even a chance he might favour a cut if a slowdown in Britain’s economy worsened.
Underscoring how the mood at the BoE in the last few months has shifted away from signalling a first rate hike since before the financial crisis, Vlieghe also said economic growth and interest rates might be permanently lower.
“For a given level of growth, real interest rates may remain significantly lower than in the past,” he said in his first speech since joining the BoE from a hedge fund in September.
“The possibility of this scenario makes me more patient, other things equal, before raising rates.”
Britain’s economy has grown strongly over the past two years, raising expectations the BoE would not be far behind the U.S. Federal Reserve which raised interest rates last month.
But Britain’s recovery lost some of its momentum in the second half of last year as the global economy slowed. Inflation is close to zero and any pick-up in prices will be limited by a fresh fall in oil prices.
Economists have pushed back their expectations for the BoE’s first post-crisis rate rise to the second half of this year, while markets are betting on no tightening until 2017.
Governor Mark Carney is expected to address rate expectations in a speech at 1200 GMT on Tuesday. In July last year, he said a decision on whether to raise rates would probably become clear around now. But that was before a series of setbacks to British and global economic growth.
Vlieghe, answering an audience question after his speech at the London School of Economics, said the BoE’s next policy move was still likely to be a rate hike but it could become more finely balanced if there was more bad news on the economy.
“On the balance of probabilities I do think the next move in rates is up. But clearly if the disappointments keep coming, then that becomes a more marginal case than it is now,” he said.
Vlieghe said he had been struck by the failure of wage growth to pick up despite a fall in unemployment, which suggested there was spare capacity in the economy.
Previously, only one of the Bank’s nine rate-setters – the Bank’s chief economist Andy Haldane – has raised the possibility of voting for a rate cut.
Vlieghe sounded more cautious about the idea of a cut than Haldane. In his speech, he said he would not back a rate rise until he was sure growth was no longer slowing, and that a mix of inflation measures were pointing up. Growing wage pressures were “surprisingly absent”.
Heavy indebtedness, ageing populations and growing inequality all clouded the economic outlook in Britain and abroad, potentially for decades, Vlieghe said.
“The economy may not revert to its pre-crisis average levels of growth and interest rates,” he said.
Traditional economic models which assumed growth and interest rates would return to pre-crisis levels should be treated with caution, and helped explain why private sector forecasters had misjudged BoE policy in the past, Vlieghe added.
“We may not have to raise rates very much once we start. Moreover, the fact that, at very low interest rates, policy cannot respond as effectively to bad news as it can to good news also makes me more patient before raising rates,” he said.
Source: Reuters (Editing by William Schomberg and John Stonestreet)