LONDON: Britain’s economic recovery might stall if interest rates rise too soon, the Bank of England’s chief economist said as he offered the strongest signal yet that the bank is prepared to delay increases in borrowing costs.
Andrew Haldane said he was more downbeat about the outlook for the economy, given weaker global growth, greater financial and political risks and the danger that wages and productivity in Britain might continue to fail to recover as forecast.
“Put in rather plainer English, I am gloomier,” Haldane said in a speech to businesses in central England. “This implies interest rates could remain lower for longer, certainly than I had expected three months ago.”
Haldane, who took over as chief economist at the BoE in June, gave an unusually specific steer to financial markets on when the BoE might start to raise interest rates.
In an interview with ITV television, he said market expectations that rates might rise “somewhere in the middle of next year” were possibly “not a bad bet” although the economic outlook could change a lot before then.
Sterling fell by around half a cent against the dollar after Haldane’s speech was released. It also dipped against the euro.
UK base rates have sat at a record low of 0.5 percent since the depths of the financial crisis more than five-and-a-half years ago.
Market expectations of when they will finally rise have swung sharply in the past few days after the biggest global sell-off of shares in two years due to fears of slower growth and rising political risk.
Marc Ostwald, a fixed income strategist at ADM Investor Services International, said markets were currently betting on a rate rise around September, though earlier this week some measures had implied no increase in rates at all next year.
By contrast, just a couple of weeks ago markets expected a rate rise in early 2015, and a poll published on Thursday still showed most economists expected rates to rise before March due to rapid economic growth.
So far, two of the Bank of England’s nine policymakers have voted to start raising in interest rates. “Haldane’s comments have added to the changing market expectations of a rate hike,” said Alvin Tan, currency strategist at Societe Generale.
Haldane’s language marked a sharp change of tone since his last major speech in June, when — in a cricketing analogy — he said he favoured being on the front foot rather than the back foot when it came to raising rates.
Britain’s economy was now “writhing in both agony and ecstasy”, Haldane said on Friday. Growth was set to be the fastest among major nations this year and inflation and borrowing costs were low. But real wages and productivity had endured their weakest run since the 19th century, apart from the aftermath of World War Two.
Bank of England Governor Mark Carney said earlier lasy week the central bank would need to take into account signs of a slowdown in the euro zone when setting rates, and Haldane said that there was a risk Britain’s strong growth could prove temporary. Reuters
