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Interest rates 'should only rise if wage growth and inflation pick up'

Published 20/04/2016

The Bank of England has kept interest rates on hold since March 2009
The Bank of England has kept interest rates on hold since March 2009

The Bank of England should move to increase interest rates only if wage growth and inflation pick up pace, according to policy maker Ian McCafferty.

In a speech at the Bank, Mr McCafferty said: "A shift in the balance of risks to inflation should lead to a re-evaluation of the appropriate stance of policy.

"The first avenues for such a change would likely be either the dissipation of the external forces holding down headline inflation, or renewed wage growth."

The member of the Bank of England's Monetary Policy Committee has been a sole dissenter on the MPC calling for rates to rise, until he changed his position in February and voted to keep rates on hold.

"Last summer, in voting for an increase in Bank rate, I had expected that the narrowing of slack would drive up wages through 2016 as firms competed for increasingly scarce labour. But it now appears that opposing factors are acting to hold wage growth down, for rather longer than I had thought."

Mr McCafferty said wage growth had been hampered by low headline inflation, but could grow quickly if prices start to rise.

All nine policymakers on the MPC voted to leave rates at 0.5% this month - where they have remained since March 2009 - and keep its quantitative easing programme on hold at £375 billion.

However, Mr McCafferty added: "I t is entirely possible that the reversion of my vote of no change to Bank rate might be relatively short-lived."

Official figures revealed last week that Consumer Prices Index inflation rose to its highest level for 15 months in March, stepping up to 0.5%.

Mr McCafferty said the growing gloom over emerging-market economies and the impact of the falling oil price on financial markets and inflation had also pushed him towards voting to hold interest rates at their current level.

But he added: "Much as my view on the timing of inflation developments has changed while my fundamental view of the economy has not, I have changed my immediate vote for an increase in Bank rate without abandoning my preference for gradualism in policy normalisation."

"Even though the appropriate timing for starting the process of policy normalisation has been delayed, the benefits of a gradual rise in interest rates once we start remain, to me, convincing."

He said a close eye would need to be kept on the fall in the value of sterling to see if it becomes "persistent", but added it would prove difficult amid the increased uncertainty surrounding Britain's referendum on the European Union.

He said heightened uncertainty linked to the referendum may "weigh on investment in the coming months", leading to "slight softening in GDP growth through the summer".

It comes after Bank governor Mark Carney said on Tuesday that risks posed by the EU referendum had ''the potential to reinforce existing vulnerabilities in relation to financial stability'', including the UK's high current account deficit, the property market and market liquidity.

He added: ''Some elements of these risks may be beginning to manifest.''

It followed comments by the MPC last week that the economy may face ''an extended period of uncertainty'', as it considered the ''likely implication for monetary policy'' if Britain left the EU.

Experts are predicting interest rates to stay at 0.5% until 2017, although some believe a rate rise might come even sooner if Britain votes to stay in the EU.

The Bank has been in no hurry to raise rates, with inflation remaining historically low and way off the Government's 2% target.

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