News Column

Interest rates likely to rise in spring 2015, warns Bank policymaker

February 21, 2014

Larry Elliott Economics editor



UK homeowners and businesses should be braced for an interest rate rise around the time of next year's election, a senior Bank of England policymaker has said in the most explicit guidance yet provided by Threadneedle Street.

Martin Weale, one of the nine members of the Bank's monetary policy committee (MPC), said the most likely time for rates to rise from their record low of 0.5% was the spring of 2015. With the election due in May next year, Weale's comments raise the possibility that the Bank could move before the parties begin campaigning rather than wait for the new government to be chosen at the polls.

Weale said in an interview with Sky News: "I think it is very helpful if we try and explain that the most likely path for rates is that the first rise will come perhaps in the spring of next year. And then the path is likely to be relatively gradual."

The Bank has held rates at 0.5% since March 2009 in an attempt to help the economy recover from the deep recession of 2008-09. Despite robust growth since early 2013, Threadneedle Street has adopted a policy of forward guidance to reassure individuals and companies that dearer borrowing is not imminent.

But the Bank expects a large part of the economic slack left by the recession to be used up over the coming months, and Weale confirmed City expectations that the first rate rise since mid-2007 will occur before the middle of next year.

Weale did not rule out raising rates during the weeks before a dissolution of parliament. "During an election campaign it would obviously be difficult [to change rates] but the election campaign will last for three weeks," he said.

He added that if average earnings - which have been running below inflation for several years - were to grow more quickly than anticipated over the coming months, rates would need to go up before the spring of 2015. "I couldn't rule out the need for a rate rise coming earlier."

Weale, one of the four members of the MPC appointed from outside the Bank, said it was unlikely that interest rates would return to their pre-crisis levels of around 5% for the foreseeable future.

In the past week, MPC members have given interviews aimed at reassuring the public that rates are not about to go up. The Bank has seen the need to spell out its message after the original form of forward guidance - which involved no discussion of a rate rise until unemployment fell to 7% - was called into question by the faster than expected fall in the jobless total.

Weale was the only MPC member to object to the form of guidance proposed by the Bank's governor, Mark Carney, and he said he would have been more critical if he had known what was about to happen to the labour market. "Had I thought that there was a substantial probability that because of the movement of unemployment that [forward guidance] would have a life of less than a year then I wouldn't have been enthusiastic," he said.

Weale expressed concern about the property market, where mortgage demand is up by a third on a year ago.

"I do worry that house prices are very elevated," he said. "It's true that in inflation-adjusted terms they are probably still lower than they were in 2007 but that doesn't tell you very much because no one thought that the level of house prices in 2007 was a source of comfort."

Weale's comments came as the CBI said there had been a marked improvement in industry's order books in the past month and that factory output had rarely been rising more strongly since its records began in 1975.

Of the firms questioned, 41% said output was up over the past three months, while 17% said it had fallen. The balance of +24 points was up from +18 points in January.

Anna Leach, head of economic analysis at the employers' organisation, said: "The manufacturing sector shows continued signs of improvement with demand high and steady and output growing strongly. Growth is increasingly broad-based and firms' growth expectations are the highest for several months."

Captions:

Martin Weale said rates would increase gradually after their initial rise


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Guardian (UK)


Story Tools