BOE's Most Dovish Member Now Sees Need for Rate Hike--Update

By Paul Hannon Features Dow Jones Newswires

The Bank of England policy maker seen as least likely to back a rise in interest rates has changed his view and now thinks an increase may be needed soon.

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In a speech to economists, Gertjan Vlieghe said the U.K. economy was running through its spare capacity quicker than he had expected, while household spending was stronger.

"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 [the] bank rate might be as early as in the coming months," he said Friday.

Mr. Vlieghe's comments followed a Bank of England statement Thursday with the same message.

The British pound, which rallied on Thursday's announcement, made further ground Friday, rising as much as 1.5%.

Based on his previous comments, Mr. Vlieghe had been regarded as the member of the nine-strong Monetary Policy Committee most inclined to oppose a rise in the key rate from a record low of 0.25%.

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This week's signaling from the BOE means three of the world's major central banks are moving in sync for the first time in years toward ending the postcrisis era of easy money.

The pound's jump is an indication that traders and investors are becoming more convinced that a rate move is likely soon.

"Vlieghe's comments further raise the odds of a November hike," said Allan Monks, an economist at J.P. Morgan.

The BOE Thursday held its benchmark interest rate steady at 0.25% following its September policy meeting but the rate-setting MPC said in a statement that a majority of officials on the nine-member panel believe borrowing costs will soon need to rise to bring annual inflation back to its 2% goal. Annual inflation hit 2.9% in August.

An interest-rate increase--the first in the U.K. in almost a decade--is likely "over the coming months," the panel said, if the economy performs broadly in line with officials' expectations.

Before his speech, many BOE watchers viewed Mr. Vlieghe as one of a minority of members who might oppose a rate increase, since he hadn't voted for a rate rise since joining the MPC in 2015 and last year was considering the case for a rate cut. With his change of heart, the MPC appears to be moving toward a consensus on the need to a rate increase.

"It is no longer clear which members are in the dovish minority," said Mr. Monks.

Before this week's comments, traders and investors had been skeptical of the BOE's declared willingness to raise rates in part because it has a recent history of seeing its plans derailed by surprise developments, including last year's vote to leave the EU. In response to the pound's sharp fall in the wake of that decision, the BOE cut its key interest rate to a record low in August 2016, and restarted a paused program of bond purchases.

Growth in the U.K. has slowed, but inflation is accelerating, twin consequences of the Brexit vote. Officials had believed the inflation gains would soon fade, allowing them to hold borrowing costs low to support a slowing economy. But in recent months, they have become increasingly concerned that subdued investment and feeble productivity growth are hurting the economy's capacity to produce goods and services without causing inflation.

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

(END) Dow Jones Newswires

September 15, 2017 08:08 ET (12:08 GMT)