The Bank of England’s chief economist has poured cold water on the prospect of an immediate interest rate hike, but said he could vote for a rise later this year.
Andy Haldane has argued that rates should be kept steady in the near-term, but that a cut to its wide-reaching post-Brexit stimulus programme may be on the cards in the last half of 2017.
“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,” Mr Haldane said during a speech in Bradford.
His comments boosted the pound, which rose 0.5% versus the pound to 1.269, and 0.4% against the euro to 1.138.
It comes after three Bank policymakers called for a rate rise in June amid warnings that Brexit-fuelled inflation – which hit 2.9% in May – is set to surge further over the summer.
But Bank Governor Mark Carney said earlier this week that “now is not yet the time to begin that adjustment”, while wages continue to stagnate and the impact of Brexit on the economy is unclear.
Mr Haldane – who was recently re-elected to the Monetary Policy Committee (MPC) for another three-year term – said he voted to keep interest rates at a record-low of 0.25% this month given similar concerns.
“First, despite upwards pressure on inflation, there are still few signs of higher wage growth. And despite robust surveys, there is still some chance of a sharper than expected slowing in the economy. Both are reasons for monetary policy not to rush its fences,” Mr Haldane said in a speech in Bradford.
“Second, there is the election. This has thrown up a dust-cloud of uncertainty,” resulting in a weaker exchange rate which Mr Haldane said could impact consumer and business confidence.
“I do not think adding a twist or a turn from monetary policy would, in this environment, be especially helpful in building confidence, at least until the dust-cloud has started to settle,” he added.
The prospect of a late-year stimulus withdrawal come after weekend reports suggested the MPC is mulling over plans to scrap the £100 billion Term Funding Scheme – which offers banks cheap loans – introduced after the Brexit vote.
As part of its stimulus programme, the Bank also ramped up its quantitative easing (QE) programme by £60 billion to £435 billion and bought £10 billion of corporate debt, meant to lower the cost of borrowing for companies.
“As and when the MPC begins this process of normalising monetary policy, it will be a sign of the economy itself having begun to normalise,” Mr Haldane said.
“Far from being a cause for concern, starting the process of withdrawing some monetary policy insurance should serve as a signal of the MPC’s confidence in the UK economy’s resilience and in inflation returning sustainably to its 2% target.”
However, Ian Kernohan, an economist at Royal London Asset Management, said that an interest rate hike is unlikely to garner enough support from the MPC.
“Our own view is that the impact of political uncertainty on business confidence and the continued squeeze on household real incomes make a rate rise unlikely.
“It is not yet clear if any weakness in consumer spending is being offset by investment and net trade.
“Domestic inflationary pressures and, in particular, wage growth remain very subdued, with most of the recent rise in inflation due to the temporary impact of sterling devaluation.”