Key Bank rate-setter pours cold water on prospect of interest rate hike

A key rate-setter at the Bank of England has poured cold water on the prospect of an interest rate hike, and said the economy is strong enough to handle cuts to its post-Brexit stimulus package.

The Bank’s chief economist Andy Haldane has argued that rates should be kept steady despite rising inflation in light of the slowdown in wage and economic growth, as well as uncertainty in the wake of the General Election.

“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.

His comments come after three Bank policymakers called for a rate rise amid warnings that Brexit-fuelled inflation is set to surge further over the summer.

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Bank Governor Mark Carney also said on Tuesday “now is not yet the time to begin that adjustment” after inflation hit 2.9% in May – its highest level in nearly four years and far higher than expected.

However, the recently re-elected Monetary Policy Committee member has argued for paring back the stimulus package which was introduced last August in the wake of the Brexit vote last year.

He 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.”

His comments come after reports surfaced over the weekend suggesting 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 QE programme by £60 billion to £435 billion and bought £10 billion of corporate debt, meant to lower the cost of borrowing for companies.

Mr Haldane said: “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.

“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.”