August 31 2014 Latest news:
Duncan Brodie, business editor
Friday, January 24, 2014
Interest rates could remain at their current historic low for some time, despite the steeper-than-expected fall in unemployment, a Bank of England policymaker has indicated during a visit to Suffolk.
Martin Weale, an independent member of the bank’s interest rate-setting Monetary Policy Committee (MPC), was speaking on the first day of a two-day visit to Suffolk to seek out the views and concerns of local businesses through a round of company visits and round-table discussions.
“The mood of the businesses I have seen so far is one of reasonable optimism and undoubted improvement,” he said. “Things have been quite a bit better in the past year and the hope, and expect, that to continue.
“They have been through difficult times and have found it difficult but my sense is that they have come through.”
Under a new policy of “Forward Guidance “ launched last summer following the arrival of Mark Carney as governor of the Bank of England, the MPC said it would not consider raising its interest rate from the current low of 0.5% until the UK unemployment rate fell to 7%.
At the time, the bank did not expect such a level to be reached until 2016 but the rate is now within touching distance of that threshold, at 7.1%, and this has sparked speculation over an early rise in interest rates.
Mr Weale, who was the only member of the MPC to vote against the policy of Forward Guidance, said yesterday that his concern that that time, with inflation having then recently approached 3%, was the risk of creating an impression that the bank was prepared to be more tolerant than previously of a prolonged period of above-target inflation.
The subsequent fall in inflation back to the 2% target level, at the same time as the rapid fall in unemployment, was very welcome but a trend he acknowledged he had not foreseen.
There have been suggestions the MPC should now lower the 7% threshold to, perhaps, 6.5%, but Mr Weale said he did not believe this would achieve the core aim of Forward Guidance, as any new threshold could also quickly be overtaken by events.
“I do not feel terribly enthusiastic about a reduction from 7% to 6.5%. The purpose of Forward Guidance was to create greater certainty.”
However, he said the MPC had been clear all along that the unemployment rate was only one of many factors which would shape any decision to raise interest rates and, with wage increases still well below inflation, there was scope for rates to remain at their current level for a while yet.
Mr Weale added that he did not believe the bank should start to unwind its programme of Quantitative Easing − under which it purchased Government debt to boost the money supply during the recession − until interest rates had returned to a more normal level, perhaps 2.5% to 3%.
This would give the MPC scope to support the economy by cutting rates should the process of selling down the asset purchase programme have an unforeseen negative impact.