Interview: The Bank of England's premier dove is not for turning

Gertjan Vliege talks to The Independent about Brexit, asymmetric risks and high-profile central bankers

Ben Chu
Economics Editor
Monday 03 July 2017 17:22 BST

On the floor of Gertjan Vlieghe’s wood-panelled Bank of England office sits a small doorstop in the shape of a hedgehog – an animal not renowned for its speed. And its patient owner is certainly in no hurry to put up interest rates.

Mr Vlieghe, 46, who joined the Bank’s Monetary Policy Committee as an external member in 2015 has established himself as the most dovish member of the rate-setting committee.

Even before the Brexit referendum Mr Vlieghe was publicly fretting about the fragility of the UK economy and even floated the possibility that interests rates might need to pushed by the Bank into negative territory.

And so when the Leave side unexpectedly prevailed last June, prompting widespread fears of an imminent recession, Mr Vlieghe voted for an immediate cut in rates to 0.25 per cent. The eight other members of the Monetary Policy Committee wanted to hold their fire until they saw more data, although they joined him the next month in sending rates down to a new record low.

But now many of Mr Vlieghe’s colleagues are breaking the other way. In June, three external MPC members voted to increase rates back to 0.5 per cent, reversing last August’s cut, and creating the biggest split on the committee since 2011.

And since then, significantly, Andy Haldane, the Bank’s chief economist, has signalled that he is ready to join the hikers. If the arch-dove Mr Vlieghe were also to switch sides many financial traders would probably assume an August rate rise from Threadneedle Street was nailed on.

But not so fast. This dove is not for turning – at least not yet.

“I haven’t really changed my mind,” he says. “This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late because of the asymmetry around risk.”

That risk, in Mr Vlieghe’s view, relates to the fact that rates are currently so close to zero. If the Bank raises rates and then has to reverse course because the economy falters it has much less room to cut.

“Our ability as a central bank to stimulate spending is...smaller than our ability to restrain spending,” as he put it in an unusually wide-ranging speech analysing the major structural economic forces acting on the UK economy in 2016.

Though he admits that inflation, which hit 2.9 per cent in May, is “uncomfortably high” he sees that primarily as the natural pass-through of the slump in the pound in the wake of the Brexit vote.

And he’s more concerned about the underlying weakness of the economy. Though the UK did not go into recession last summer, many see Brexit-related chickens coming home to roost now in the form of dwindling consumer confidence.

“I think the consumption slowdown is here, it’s not over,” says Mr Vlieghe, adding that he does not see investment and exports taking over the baton and driving growth.

“Of course if the data turns out stronger I do agree that a higher rates is warranted but my central forecast is that’s not going to happen in the near term.”

So would he be happy to vote in a minority to keep rates on hold, while the rest of his colleagues wanted to hike? Mr Vlieghe is unperturbed by the thought. “I will do whatever my reading of the data tells me is the right thing,” he says, matter-of-factly.

One gets the impression that the intellectually self-assured Mr Vlieghe, who traded in a partnership at the hedge fund Brevan Howard to join the MPC, would rather relish the prospect of arguing his corner against the odds.

“I spent ten years trying to forecast what central banks, including the Bank of England, were going to do next,” he says. “Having the opportunity to actually make the decision, rather than forecast it, was for me both fascinating and an honour and a privilege. The closest thing you can compare it to is if you sit in the football commentator’s box and someone says ‘do you want to go down on the pitch for a while?’”.

Mr Vlieghe’s office neighbour at the Bank, until this month, was fellow external MPC member Kristin Forbes. She has now left the Bank and in her final speech she suggested modern central bankers’ high profiles were making them too reticent to “take away the punch bowl” by raising rates.

“I completely disagree with that,” says Mr Vlieghe. “All of the decisions that have been made over the last few years have related very clearly to the data. We have been in an environment where, despite record low interest rates, growth has been subdued, inflation pressures have been weak everywhere, wage pressure is still very weak – that tells you those very low interest rates were entirely appropriate. If they hadn’t been we would have seen a lot of overheating…which we just don’t see."

“That period of low rates had nothing to do with reputation or political pressure or anything like that.”

For Mr Vlieghe, who was born in Belgium but now has dual UK citizenship, Brexit has personal repercussions. But he’s tight-lipped about how he feels personally about the vote, insisting his only focus as an MPC member is considering how it will impact the economy.

But how does the committee go about forecasting that given the immense political uncertainty?

“It’s very difficult to get your head around because it doesn’t matter what we think about Brexit, it matters what everyone else thinks, and the extent to which it influences their demand today,” he explains.

If firms start worrying about a cliff-edge Brexit in two years, he says, there could yet be a big damaging pullback of investment. On the other hand, if the UK seems to be heading towards a “lengthy transition deal” after 2019, effectively remaining in the single market and the customs union, things could perk up.

“That would be a very positive thing for business and investment and would therefore influence our interest rate policy,” he says.

Even hedgehogs can move rather rapidly when they want to.

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