London - Bank of England Governor Mark Carney and policy-maker David Miles flagged the prospect of earlier-than-anticipated UK rate increases as the economy improves.
In testimony to lawmakers, Carney said the time for the benchmark interest rate to rise from a record low is “moving closer”. Hours later, Monetary Policy Committee member Miles said “the time to start normalisation is soon; that is not something to shrink from”.
Both cited improvements in the economy, particularly the strength of the labour market. Accelerating wage growth has already seen MPC members Martin Weale and Ian McCafferty respond by indicating that policy tightening will be needed soon. Data on Wednesday forecast to show a jump in earnings in the past three months may reinforce their view.
“Wages are beginning to grow, interest rates are at historically low levels, and so households should begin to manage their finances with the assumption that there should be an upward adjustment in interest rates,” Carney said on Tuesday.
Both he and Miles said any rate increases should be gradual. For Miles, that means not delaying the first move.
“I do not attach great weight to the idea that starting this process will create great risks of dropping back into very weak growth, falling into negative inflation and engendering a splurge in risk-avoiding behaviour,” he said. “I attach more weight to the risks of waiting too long and then not being able to take a gradual path.”
‘Daft idea’
Howard Archer, an economist at IHS Global Insight, said the MPC is “stepping up the rhetoric” to prepare for a rate hike.
“A move before end-2015 is starting to look a very real possibility,” he said.
The pound rose against the dollar for a second day on Wednesday after gaining 1 percent the previous day. Sterling was trading at $1.5664 as of 7.54am London time, up 0.2 percent on the day.
Miles, who will leave the MPC at the end of August, rejected the idea that the BOE has to wait until the Federal Reserve increases rates.
Economists in Bloomberg’s monthly survey forecast the UK central bank will raise its key rate from 0.5 percent in the first quarter, with markets pricing in a move even later than that. David Tinsley at UBS Group AG in London sees an increase in November this year.
“One of the push backs to a November hike is often a view expressed that the MPC will be reluctant to increase the policy rate before the US,” Tinsley said. “But Mr Miles goes out of his way” to say it is a “daft idea”.
“If the UK macro data is strong over the coming months we may see some reassessment in the market of the ‘UK needs to follow the Fed’ view,” he said.
* With assistance from Jillian Ward and Jennifer Ryan in London
Bloomberg