MPC member Gertjan Vlieghe says rising inflation and strengthening household spending mean time for increase is nearing
The pound jumped to its highest level in more than a year after a member of the Bank of England’s rate-setting committee added to expectations that interest rates could rise as soon as November.
Gertjan Vlieghe, an external member of the Bank’s monetary policy committee, put forward the arguments for a rise in rates “as early as in the coming months” in a speech to economists in London.
“Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when bank rate may need to rise,” said Vlieghe, who joined the MPC in September 2015.
Usually regarded the most dovish member of the MPC and wary of raising rates, Vlieghe was speaking the day after the Bank’s policymakers left interest rates at their record low of 0.25% amid fears over Brexit, but dropped a heavy hint that the first increase in the cost of borrowing for a decade may come sooner than expected if the economy continues to strengthen.
Any raise in rates would reverse the emergenc
y rate cut in August 2016 in the wake of the Brexit referendum, which was the first move in rates since March 2009 when they were cut to 0.5% in response to the financial crisis. The last time they were raised was July 2007.
After Thursday’s MPC meeting financial markets suggested there is a 42% chance of a rate increase in November, up from just 18% a week ago. The odds on a December rise are now 54%. Since then sterling has rallied, and after Vlieghe’s remarks the pound was up 1% at $1.3533 – the highest level since 27 June 2016, just after the EU referendum had driven the currency to 30-year lows.
The FTSE 100, which has been rising when sterling is weak because the international companies in the index make much of their profit in dollars and euros, fell by 0.8%, or 56 points, to 7,240.
Vlieghe said that his mood was moving towards a change in policy because of the low employment rate and a potential rise in wages in the coming months that put more pressure on inflation, which data this week showed had risen to 2.9% in August.
He also pointed to expectations that compensation is increasing but also cautioned that the impact of Brexit could have a more negative impact on the economy which could force policymakers to reverse any decision.
“There remains a risk that, at some stage, the uncertainty surrounding the Brexit process has a larger impact on the economy than we have seen so far. If that happens, monetary policy would respond appropriately.
“But for now, it seems the net effect of the many underlying forces acting on the UK economy is that slack is continually being eroded and wage pressure is gently building. If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in bank rate might be as early as in the coming months,” he said.
But economists at Bank of America Merrill Lynch expressed a note of caution. “The possibility of a November or February hike is real, we think. That said, we cannot understand why the BoE would want to hike rates just as currency effects on inflation are about to fade while domestic price pressure is non-existent. They seem to be panicking about the inflation peak rather than looking ahead to the likely sharp drop next year.”