Bank of England dove signals support for rate hike ‘in the coming months’
Bank of England MPC member Gertjan Vlieghe has signalled support for a potential interest rate hike in the coming months.
The Bank of England has signalled that it is a step closer to raising interest rates after one of its most dovish policymakers said he may back a hike “as early as in the coming months”.
Gertjan Vlieghe, an external voting member of the Bank’s Monetary Policy Committee (MPC), said he has been “struck” by a series of developments in the UK economy, including high inflation, employment growth, slight wage increases and stronger spending growth in the third quarter.
He also pointed to the wider economic backdrop of “improving global growth” over the past year, including across the eurozone, which tends to increase demand for UK exports.
“Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when Bank rate may need to rise,” Mr Vlieghe said in a speech delivered at the Society of Business Economists’ annual conference in London on Friday.
“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 Bank rate might be as early as in the coming months.”
It comes after official figures on Tuesday showed inflation rose by more than expected to 2.9% in August as the effects of the Brexit-hit pound continued to feed through.
His comments raise the prospect of a near-term rate rise by the Bank of England even further, after minutes of the latest rates decision showed all of the Bank’s policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
Mr Vlieghe has yet to cast a vote in favour of a hike, having fallen amongst the majority when the nine-strong MPC voted 7-2 to keep interest rates on hold at record lows of 0.25% on Thursday.
If conditions are met, he could end up joining more hawkish members including Ian McCafferty and Michael Saunders in calling for a hike.
Following his comments, the pound hit its highest level since the Brexit referendum result on June 24, 2016, after pushing past 1.35 versus the US dollar.
But the MPC member said that there were still grounds to hold steady on rates, particularly given “continued uncertainty” over the UK’s future trading relationship with the EU “and the rest of the world” in light of Brexit.
That uncertainty is likely to be dampening investment growth, with companies now putting some projects on hold until they receive further clarity.
“There remains a risk that, at some stage, the uncertainty surrounding the Brexit process has a larger impact on the economy than we have seen so far,” Mr Vlieghe said.
“If that happens, monetary policy would respond appropriately. But for now, it seems the net effect of the many underlying forces acting on the UK economy is that slack is continually being eroded and wage pressure is gently building.”
As recently as April, Mr Vlieghe used a speech in London to warn that raising interest rates too soon would be a “serious mistake” amid signs that Brexit fuelled inflation hitting consumer spending.
But he did go on to say he would be alert to signs of wider pressures pushing up inflation or a marked pick-up in spending and borrowing, which would “be my cue that a slightly higher level of Bank Rate is warranted”.