Belfast Telegraph

Tuesday 29 July 2014

3% interest rate 'to be the norm'

Charlie Bean says interest rate rises should start with "baby steps to avoid making mistakes"

A interest rate of around 3% is likely to become the norm within three to five years, according to the outgoing Bank of England deputy governor for monetary policy.

Charlie Bean's prediction that it could settle at a lower level than the pre-crash period came amid suggestions the move away from the historic-low 0.5% base rate could begin sooner than expected.

"The Bank rate averaged about 5% in the decade or so before the crisis," Mr Bean told BBC Radio 4's The World At One.

"It's reasonable to think that, because of the headwinds that are still out there as well as some the global forces ... perhaps the level that we go to three or five years out might be a couple of percentage points below that," he said.

Members of the Bank's monetary policy committee (MPC) voted unanimously in favour of leaving interest rates on hold at the same level since 2009 earlier this month.

But minutes of the meeting showed there was less agreement on the course for future rates.

The first hike had been not expected until the second quarter of next year, or late in the first quarter.

Mr Bean suggested it could start earlier with some "baby steps".

"There's a case for moving gradually because we won't be quite certain about the impact of tightening the Bank rate given everything that has happened to the economy.

"It might not operate in quite the same way as before the crisis. So that's an argument, if you like, for being a little bit cautious, moving in baby steps to avoid making mistakes.

"But of course if you want to pursue that strategy you need to start taking those baby steps a bit earlier, otherwise you end up being behind the curve.

"But there are arguments on the other side. In particular, one of the risks about moving too early is that you potentially forgo some activity that you might otherwise have had.

"One of the key issues for us will be whether we see some recovery in productivity which has been unusually subdued in recent years.

"It may be that if we nip the recovery too early we won't see that productivity rebound."

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