Advertisement

Bank of England chief economist urges against 'early lift off' for rates

A bus passes the Bank of England in London, Britain April 28, 2015. REUTERS/Neil Hall

By David Milliken

LONDON (Reuters) - The Bank of England should steer clear of an early interest rate hike, and is as likely to cut rates as to raise them in future, its chief economist has said.

Andy Haldane said recent strong wage data had not changed his view from earlier in the year about the dangers of tightening policy too soon, adding that a drag on growth from sterling strength could outweigh the gains from higher wages.

He also warned that Britain and other major economies were suffering from "lasting and durable" psychological scars from the recent recession, which could hold back growth and keep interest rates lower for longer.

"A policy of early lift-off could be self-defeating," Haldane said. "Looking ahead, I have no bias on either the size or the direction of future interest rate moves."

Haldane's comments in an advance copy of a lecture he plans to give on Tuesday contrast with those of other BoE policymakers, such as Martin Weale, who view stronger wage growth as a sign that interest rates may need to rise sooner rather than later.

Ross Walker, an economist at RBS, said Haldane remained "a bit of an outlier" on the nine-member Monetary Policy Committee, particularly as he had raised the possibility of cutting interest rates below their record-low 0.5 percent.

Most economists think the next move by the BoE would be a rate rise in around nine months' time -- although Haldane said such expectations had frequently proved wrong.

On the surface, Britain's economy appears to be booming, with record levels of unemployment and the strongest growth in eight years last year, as the country finally started to make up ground lost after the financial crisis.

More recently wages have risen at the fastest rate in five years, albeit at a still modest 2.7 percent.

However, Haldane said he did not expect a surge in salaries.

"Wages are not about to embark on a rocket-propelled ascent," he said.

Britons' reluctance to change jobs or move house at the same frequency as before the 2008-09 crisis pointed to longer-term damage to the economy caused by a reduced willingness to take risks. Consumers also seemed more likely to save rather than spend one-off gains, such as those caused by lower oil prices.

Moreover, he said that other things being equal, the 3 percent strengthening in sterling since May would reduce Britain's inflation and growth rates by 0.2 percentage points at the two-year horizon the BoE uses to set policy.

"In other words, the exchange rate news may be more important quantitatively for the two-year-ahead inflation outlook than the recent news from wages."

* To read Haldane's lecture, see http://www.bankofengland.co.uk/publications/Pages/speeches/2015/828.aspx

(Editing by Crispian Balmer)