The Bank of England’s chief economist Andy Haldane has put himself at odds with the governor by suggesting UK interest rates should soon rise, the day after Mark Carney said “now is not the time” to do so.
For the past four years, deputy governors and the chief economist have voted in lockstep with Mr Carney on monetary policy.
Although sterling gained a cent against the US dollar after Mr Haldane’s speech, the likelihood is that the bank will vote to keep rates on hold when it next meets in August and later in the year.
At its most recent meeting in June, the BoE’s Monetary Policy Committee voted 5-3 to keep rates on hold. But at the next meeting, the committee will have lost Kristin Forbes, one of the three who voted for a rise. Her replacement, Silvana Tenreyro, is known to be pessimistic about the economic outlook following the EU referendum and the June minutes did not indicate other members who voted against a rate rise were wavering.
Mr Haldane surprised his audience in the National Science and Media Museum in Bradford with his hawkish attitude especially because most of his speech was about the weakness of wages in the UK and the lack of inflationary pressure coming from the labour market.
Having also worried about a “Brexit break” — a dive in confidence and spending during the government’s negotiations with the EU27 — his comments on the need for an early interest rate rise came out of the blue.
Mr Haldane said: “Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.”
Rupert Harrison, George Osborne’s former chief of staff, tweeted that Mr Haldane was the MPC member “with the highest volatility”.
“Best guide to Andy’s positions seems to be what will most annoy the Governor . . .,” he added.
The BoE cut interest rates to their current level of 0.25 per cent last August. By May this year, inflation had risen to 2.9 per cent, its highest level for four years, and above the bank’s 2 per cent target.
Mr Haldane warned that the bank now runs a risk of leaving it too late to tighten interest rates. He spoke just one day after Mark Carney, the bank’s governor, said that “now is not the time” to raise rates, arguing that policymakers should wait to see how the economy responds as Britain enters Brexit negotiations.
Mr Haldane gave six reasons for tightening policy: better than expected global growth; a diminishing risk of populist and protectionist politics; less risk of deflation; signs that business investment may increase; inflation rising faster than expected; and that any tightening will be modest.
Mr Haldane said that he did not vote to increase rates in June because wage growth was still weak and there was a chance the economy could slow more sharply than expected. He also said that the general election “has thrown up a dust-cloud of uncertainty” and adding a “twist or turn” would not be helpful in “building confidence”.
Most of the speech discussed the changing nature of work in the 21st century. Mr Haldane said that while previously the relationship between unemployment and inflation was “strong and stable” it has been “anything but” in recent years.
An increase in self-employment, the decline in unionisation and spread of more “flexible” working arrangements such as zero hours contracts mean that falls in unemployment were no longer as likely to lead to higher inflation.