Economist offers interest rate hint


Published: Friday 17th October 2014 by The News Editor

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The Bank of England’s chief economist today gave the clearest indication yet that interest rates are unlikely to rise until the middle of next year as economic prospects have become gloomier.

Andy Haldane’s remarks appear to confirm market expectations that the probable timing of a hike has been pushed back from early in 2015 to after the general election.

Mr Haldane told business leaders at a breakfast event in Kenilworth, Warwickshire, that the economic picture has worsened in recent months meaning interest rates “could remain lower for longer”.

He was even more explicit on the timing of a hike in an interview with ITV News, telling the broadcaster: “If you believe the financial markets, they’re now betting somewhere in the middle of next year. Perhaps that’s not a bad bet.”

In his speech, Mr Haldane painted a picture of “sunshine with showers” in the British economy, with strong growth, low inflation and soaring employment contrasting with a record six-year squeeze on real terms wages and flat-lining productivity.

The latter more gloomy figures showed “an extended period of agony… virtually unprecedented going back to the late 1800s, with the exception of the aftermath of the World Wars and the early 1970s”, he added.

But a separate index of more optimistic indicators would show a reading which had only been bettered in 42 of the past 144 years.

“Rather peculiarly, the UK economy appears to be writhing in both agony and ecstasy,” Mr Haldane said.

He acknowledged that, speaking in June, he had been on “the front foot” about raising interest rates sooner but that data now appeared to favour being on “the back foot”.

“Put in rather plainer English, I am gloomier,” he added.

He said this reflected weaker global growth, greater financial and political risks and weaker upward pressure on prices from wages and world commodity prices.

“Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target.”

His remarks come amid burgeoning fears about the health of the eurozone, with ultra-low inflation threatening to descend into a damaging deflationary spiral and the continent’s biggest economy Germany apparently on the verge of recession.

Europe is also facing renewed political uncertainty over Greece, where an anti bail-out party has taken a poll lead, as well as the ongoing fall-out from the Ukraine crisis.

Meanwhile the International Monetary Fund has downgraded growth prospects for the world economy.

On the eurozone, Mr Haldane told ITV: “It’s a concern. It is our biggest trading partner by far.

“We know we’ve seen recently that any event on the continent laps back to the UK very quickly through our trade links but also through our financial links and indeed increasingly just because of confidence.

“If confidence is ebbing on the continent, it appears to leak across here pretty quickly.”

Global economic worries have spooked markets with a downward slide in recent weeks and sharp falls in recent days, leaving the FTSE 100 Index 10% off its early September level when it had tested all-time highs.

UK interest rates have been held at 0.5% for more than five years to try to nurse the economy back to health from recession but Bank governor Mark Carney has indicated that the recovery means the time for a first hike is approaching.

Earlier this year there were some forecasts that this could come as early as November though the consensus later shifted to February.

In recent days expectations have shifted back further as figures showed inflation sinking to a five-year low of 1.2% and wage growth lagging behind at 0.7%, lifting any pressure for a hike.

It meant Mr Haldane’s remarks had little effect on sterling as traders were already looking at the middle of next year as the most likely time for a rise.

But his “dovish” rhetoric appears to contrast sharply with the views of Bank of England “hawks” Martin Weale and Ian McCafferty, both also members of the nine-strong rate-setting Monetary Policy Committee.

They have already started voting for a 0.25% rate hike arguing that the Bank needs to act now to pre-empt wage and inflationary pressures further ahead.

Published: Friday 17th October 2014 by The News Editor

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