The Bank of England should withdraw its post-Brexit vote monetary stimulus “later in the year”, according to its chief economist, as the divisions among the central bank’s monetary policymakers become starker.
Andy Haldane said the Bank is running the risk of delaying too long in raising interest rates, with a hike “relatively soon” necessary. Sterling rose sharply against the US dollar, briefly breaking above $1.27 before paring some gains. The pound had earlier this morning fallen below $1.26.
In a striking intervention in the debate within the rate-setting monetary policy committee (MPC) delivered in a speech in Bradford, he said: “A partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead.
“Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.”
Haldane revealed he strongly considered a vote for higher rates at last week’s meeting, but judged the risks from a slowing economy amid slow wage growth were too great.
Added to that was the “dust-cloud of uncertainty” thrown up by the shock General Election result, which saw the Conservative party losing its majority. Haldane said a rate rise would be unwise “at least until the dust-cloud has started to settle”.
However, both inflation and growth have shown "greater resilience than expected", strengthening the case for a rise, he said. Inflation hit an annual rate of 2.9 per cent in May, further above the Bank's two per cent target rate than it had predicted.
Not acting now to hike its main rate could risk a bigger shock for interest rates at a later point, Haldane said.
Bank rate has been at record lows of 0.25 per cent since the Bank unveiled a post-Brexit vote stimulus package last August. That package also included £10bn of corporate bond purchases and the Term Funding Scheme, a lending programme for banks which is reportedly also being considered for withdrawal.
The Bank’s economists shocked markets last week as three of eight economists on the MPC voted to raise interest rates.
Haldane was not one of those three. A vote for higher interest rates from the influential chief economist would tip the balance further towards the hawks on the committee.
That would necessitate the governor, Mark Carney, casting a tie-breaking vote, based on the pattern of votes at the last meeting.
Haldane said: “I think that the balance of risks associated with tightening ‘too early’, on the one hand, and ‘too late’, on the other, has swung materially towards the latter in the past six to nine months.”
Haldane’s remarks strike a sharp contrast with those expressed this week by Mark Carney. In his Mansion House speech yesterday Carney said “now is not the time” for higher interest rates.
However, Haldane said: “Far from being a cause for concern, starting the process of withdrawing some monetary policy insurance should serve as a signal of the MPC’s confidence in the UK economy’s resilience and in inflation returning sustainably to its two per cent target.”