07 Interest Rates Can Stay Low for Longer

The Bank of England can afford to keep interest rates low for longer than previously thought, deputy governor Jon Cunliffe has said, in comments that will reinforce the market view that rates will remain at 0.5% until at least the middle of next year.

In a speech to mark his first year on the monetary policy committee, Cunliffe echoed recent dovish remarks by his policymaking colleagues who have highlighted the lack of pressure on inflation from pay.

Cunliffe said the recovery had remained strong and become more broad-based.“We can talk now of an expansion rather than a recovery,” he said, but added:“As always in economics, there is a cloud to the silver lining.”

Productivity growth was even weaker than the Bank's cautious forecast, pay growth had failed to match inflation and prospects for the global economy had deteriorated.

“The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought,” Cunliffe said in a speech to the Cambridge Society for Economic Pluralism.

That follows his fellow deputy governor Minouche Shafik telling the Financial Times there was “no significant evidence” of inflationary pressure in the economy and BoE chief economist Andy Haldane saying he had become “gloomier” on the UK economy.

Two members of the nine-strong committee have voted to hike interest rates now, however, arguing that waiting too long could mean borrowing costs have to rise faster.

Cunliffe said the MPC was left with the question of “whether the risk of not waiting until the picture is clearer is outweighed by the risk of not acting in time” on interest rates, which have been at a record low for more than five years.The deputy governor indicated he was in the latter camp.

“With the scope for tightening monetary policy substantial,but the scope for loosening it much more limited, the risk of a surprising pick-up in inflationary pressure may be more manageable than the risk of the expansion stalling and inflation dropping further,” he said.