Leading central banker claims interest rate rises by Bank of England unlikely as markets are 'spectacularly misguided'
Tuesday 24 September 2013
Markets are “spectacularly misguided” if they think interest rate rises are around the corner or that the economy is back to normal, a leading central banker has warned.
In a staunch defence of the Bank of England's new "forward guidance" policy, David Miles said a few quarters of upbeat growth do not mean the economy is fixed, and Britain is likely to see a slow fall in unemployment.
The Bank launched the radical policy last month, saying it will not consider raising interest rates from their record low until unemployment has fallen to 7 per cent from its 7.7 per cent level - barring a spike in inflation fears.
Forward guidance aims to give households and businesses confidence to spend, safe in the knowledge that rates will stay low for around three years.
But markets have responded to increasing signs of growth across factories, building sites, restaurants and banks with sharp rises in market swap rates which fix the price of mortgages, also driving the pound higher.
Investors increasingly predict unemployment will drop to 7 per cent sooner than the Bank's mid-2016 forecast, pricing in interest rate hikes by mid-2015.
But Mr Miles, one of nine members of the Bank's rate-setting Monetary Policy Committee (MPC), told an audience at Northumbria University in Newcastle that rate hikes would derail Britain's "embryonic" recovery.
He said: "I am now more confident that we are on the path to recovery than at any time since I joined the MPC in the first part of 2009.
"What a potentially self-confirming and stronger path for output and confidence does not need right now is tighter monetary policy."
He said Britain will need a long stretch of above-average growth to fill slack in the economy, meaning a steeper fall in the jobless total is unlikely.
Mr Miles pointed to huge numbers of workers who have been forced to take part-time work but want to work more - meaning a lot of slack in the jobs market.
Official statistics recently showed the number of people working part-time because they cannot find a full-time job has hit a record high of 1.45 million, and has doubled over the past five years.
Mr Miles said: "A very welcome couple of quarters of normal (or a bit above normal) growth should not mean that policy is about to be tightened."
He added: "It is quite possible to get average growth in the economy for six or eight quarters - and maybe above average growth - and yet unemployment does not fall much because productivity growth is rapid."
The policymaker said the "benign" tightening of market rates does not mean forward guidance has backfired.
He said the implication that the Bank does not welcome signs of recovery, because of the market rate rise, is an "Alice in Wonderland, upside down" mentality.
The Bank recently upgraded its forecast for third quarter growth to 0.7 per cent, matching the growth rate in the April to June quarter. Mr Miles said the economy might be expanding at an annual rate of 2.5 per cent to 3.5 per cent - which is "unambiguously good".
Until recently he had been one of a handful of MPC members calling for another dose of quantitative easing, but Mr Miles said "overwhelmingly positive" news on the economy means more asset purchases are no longer warranted.
His speech echoed a defence of forward guidance by fellow MPC member Ben Broadbent yesterday.
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