BOE's Haldane Raises Prospects for Rate Increase -- Update

By Paul Hannon Features Dow Jones Newswires

Differences have emerged in the Bank of England's most senior ranks over the need for a rise in interest rates, as Chief Economist Andrew Haldane Wednesday said he had changed his view and now favored an increase this year.

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The pound rose on the news. Mr. Haldane's comments, in a speech in the northern English city of Bradford, came a day after BOE Gov. Mark Carney laid out the case against raising the central bank's key interest rate.

While members of the rate-setting Monetary Policy Committee are supposed to vote on their personal preference and not seek consensus or follow the governor's lead, there has been relatively little dissent during Mr. Carney's time at the helm.

Those members who have voted to raise the key interest rate--numbering three at the June meeting--have been what are known as external members of the MPC, or people who don't work for the bank full-time and typically return to academia or their previous career after their three-year term has ended.

None of the senior BOE officials who have sat on the committee since Mr. Carney took office in 2013 have cast a dissenting vote, but that is now the prospect offered by Mr. Haldane's change of heart.

Outlining the reasons for that change, Mr. Haldane explained that he now sees the risk of raising rates too late as being greater than the risks of moving too early.

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The pound was last up 0.4% at $1.2681, from around $1.2650 just before Mr. Haldane's speech.

"The risks of tightening "too early" have shrunk as growth and, to lesser extent, inflation have shown greater resilience than expected," he said. "And if policy tightened 'too late,' this could result in a much steeper path of rate rises later on."

Mr. Haldane suggested he had come close to joining the three dissenters earlier this month, having "considered the case for a rate rise at the MPC's June meeting" before deciding that a move later in the year would be more prudent.

He noted that June's general election, which left Prime Minister Theresa May with the support of a minority of lawmakers and needing the backing of another party, had "thrown up a dust-cloud of uncertainty."

"I do not think adding a twist or a turn from monetary policy would, in this environment, be especially helpful in building confidence, at least until the dust-cloud has started to settle," he said.

In August 2016, the BOE cut its key interest rate to a record low of 0.25% and reactivated a dormant bond buying program in response to Britons' vote to leave the European Union.

Mr. Haldane said policy makers should prepare to remove some of that stimulus, suggesting that for now he favors only a modest tightening in policy.

"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," he said. "Certainly, I think such a tightening is likely to be needed well ahead of current market expectations."

In a rescheduled speech to bankers at Mansion House in London, Mr. Carney said weak wage growth raised questions about the strength of domestic inflationary pressures, and he was unsure how the economy would respond to talks between the U.K. government and the rest of European Union on the terms of their separation.

"From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anemic wage growth, now is not yet the time to begin that adjustment," he said.

Mr. Haldane cited weak wage growth as a reason to wait until later in the year, and said growth could be slower than the BOE expected.

"Both are reasons for monetary policy not to rush its fences," he said. "Nor does it need to do so, given the slow build of nominal pressures in the economy."

The pound's depreciation since the June 2016 vote to leave the EU has pushed up import prices, and the MPC expects inflation to be above its target over coming years.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 21, 2017 10:51 ET (14:51 GMT)