Time to raise in­ter­est rates, says for­mer Bank deputy

Sir John Gieve urges MPC to re­verse 0.25pc rate cut, with Bri­tain avoid­ing a post-ref­er­en­dum slump

The Daily Telegraph - - Business - By Szu Ping Chan and Tim Wal­lace

THE Bank of Eng­land should raise in­ter­est rates to­day and re­verse part of the emer­gency stim­u­lus de­ployed af­ter the Brexit vote, ac­cord­ing to a for­mer deputy gov­er­nor.

Sir John Gieve said there was a “very strong case” for rais­ing rates be­cause the eco­nomic slump pre­dicted in the wake of the EU ref­er­en­dum re­sult had not ma­te­ri­alised. Ahead of the Bank’s de­ci­sion, Sir John said un­cer­tainty sur­round­ing the UK’S fu­ture re­la­tion­ship with its big­gest trad­ing part­ner was likely to weigh on growth for the next few years.

How­ever, the for­mer deputy gov­er­nor for fi­nan­cial sta­bil­ity said: “I don’t think in it­self it should be caus­ing the Bank to hold rates down to pump up de­mand.”

Bank pol­i­cy­mak­ers, in­clud­ing Gov­er­nor Mark Car­ney, voted to cut in­ter­est rates to a fresh low of 0.25pc a year ago, as part of a four-pronged stim­u­lus pack­age de­signed to sup­port jobs and growth. In­vestors and econ­o­mists be­lieve the Bank will keep in­ter­est rates at a record low to­day, although pol­i­cy­mak­ers are ex­pected to re­main di­vided on whether to tighten pol­icy af­ter a 5-3 vote split at their June meet­ing.

Kristin Forbes, one of the Bank’s most hawk­ish pol­i­cy­mak­ers, has since left the Mon­e­tary Pol­icy Com­mit­tee.

Sir John said: “I think there is a very strong case for re­vers­ing the quar­ter per­cent­age point cut from last year. The ra­tio­nale be­hind that was there was a risk that the shock of the vote would drive [de­mand] down ex­ces­sively in the short term and the Bank tried to pre­vent that.

“Per­haps they did, per­haps it wasn’t nec­es­sary. But ei­ther way there hasn’t been a shock to de­mand.” Speak­ing at an event or­gan­ised by Fathom Con­sult­ing, Sir John high­lighted that the Bank had al­ready re­versed mea­sures im­ple­mented in the wake of the Brexit vote that were de­signed to free up lend­ing.

He said it was now “quite dif­fi­cult to ar­gue that they shouldn’t re­verse the 0.25 per­cent­age point cut” given the con­tin­ued drop in un­em­ploy­ment, which now stands at the rate the Bank as­sumes will start to gen­er­ate in­fla­tion­ary pres­sures as a tighter labour mar­ket drives up pay. Sir John said it was not the Bank’s job to “re­sist” re­bal­anc­ing to­wards ex­ports by boost­ing con­sumer de­mand with low in­ter­est rates.

Erik Brit­ton, direc­tor at Fathom and a for­mer Bank of Eng­land econ­o­mist, agreed that in­ter­est rates should rise, say­ing: “If not now, when? If we can’t do it when in­fla­tion is above tar­get, when un­em­ploy­ment is at its ‘nat­u­ral rate’ and when growth is rea­son­able, I don’t know when we’re go­ing to do it.”

Speak­ing at the same event, Sir Char­lie Bean, also a for­mer Bank deputy, sug­gested that clar­i­fy­ing the UK’S fu­ture re­la­tion­ship with the EU sooner rather than later would boost the Bri­tish econ­omy and ex­ports. While Fathom noted that most ex­porters had used the ben­e­fits of a weaker pound to boost mar­gins, he added: “That doesn’t im­ply there won’t be an in­crease in net ex­ports be­cause the in­crease in prof­itabil­ity of ex­porters should en­cour­age ex­pan­sion in those sec­tors.”

Sir Char­lie said ex­ports were “a nat­u­ral area” for stronger growth fol­low­ing the drop in ster­ling’s value as the global econ­omy con­tin­ued to strengthen.

While he noted it was “dif­fi­cult” to see ben­e­fits in the com­ing months, he said the boost to ex­ports was more likely to ma­te­ri­alise when the UK’S trad­ing re­la­tion­ships be­came clearer.

Signs of cau­tion are ev­i­dent in the con­struc­tion sec­tor, which suf­fered a fall in new or­ders last month as com­pa­nies re­fused to com­mit to ma­jor new projects and the slug­gish hous­ing mar­ket dented res­i­den­tial ac­tiv­ity.

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