The Bank of England’s chief economist, Andy Haldane, shook the pound yesterday as he voiced fears over persistent low inflation.
Mr Haldane – who as recently as last June said policymakers should be ready to “get on to the front foot” with interest rate rises – caught financial markets off guard with comments that the chances of a rise or a cut from the current all-time low of 0.5 per cent were “broadly evenly balanced”.
The remarks pushed sterling down more than a cent against the dollar to $1.4714, with the economist also stating that the risks to the inflation outlook were “skewed to the downside”. The pound also dropped sharply against the euro, hitting €1.3719 at one stage.
“My view would be that policy may need to move off either foot in the immediate period ahead, depending on which way risks break,” Mr Haldane added.
His comments came ahead of official figures next week that are set to show the Bank’s official inflation benchmark, the consumer prices index, falling even closer to zero from its January record low of 0.3 per cent. This is far below the 2 per cent target of the Bank’s rate-setting Monetary Policy Committee, on which Mr Haldane is a member.
Mr Haldane stressed his view was not that of the MPC as a whole, but it surprised Bank watchers following minutes of the last policy meeting published on Wednesday. “There was no indication in the Bank of England’s minutes that any member was so close to thinking there might be a case for a cut,” Investec’s chief economist, Philip Shaw, said.
Mr Haldane voiced worries over weak growth in wages – potentially caused by higher numbers of older workers or migrants entering the workforce – meaning that falls in unemployment “might have a lower impact on wage pressures than in the past”.
He also suggested that there may be more slack in the economy than the Bank currently believes. Household inflation expectations have also fallen, which “would add to the scale and duration of potential downside risks to UK inflation”.
Andy Scott, director of the currency broker HiFX, said: “Whilst he said the remarks represent his own view... they carry additional significance in light of the fact that several central banks have cut rates recently due to falling inflation.” Sweden was the latest to cut rates yesterday, while the US Federal Reserve chairman Janet Yellen has played down the prospect of imminent rate hikes, cutting growth and inflation forecasts last week.
The Bank has said rate rises will be “limited and gradual”, although the Office for Budget Responsibility (OBR) now assumes the first increase is still more than a year away in “mid-2016”. Its forecasts for 2019-20 show rates of just 1.9 per cent – 0.5 percentage points lower than its last forecast four months ago.
The slide in long-term rates has been driven by more subdued global growth prospects, a stronger pound and a €1.1trn (£790bn) bond-buying programme from the European Central Bank, inflating the cost of government debt and pushing down yields.
Deutsche Bank’s chief economist, George Buckley, said the OBR’s stance reflects dramatic changes in money markets since December. The rising value of the pound is “also doing a bit of the tightening” for the Bank, he added.Reuse content