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Rates may rise within a year, says Bank deputy: Outgoing governor warns of increases by next spring Interest 'to go up in baby steps then settle at 3%'

May 26, 2014

Julia Kollewe



UK interest rates could start rising before next spring - but "in baby steps" - and are likely to settle at about 3% in a few years' time, the Bank of England's outgoing deputy governor has predicted.

It will take three to five years for borrowing costs to rise to about 3%, Charles Bean said, but below the average of 5% seen in the decade before the financial crisis. The main UK interest rate has been held at 0.5%, a historic low, since March 2009, and the central bank's governor, Mark Carney, has indicated that rates will not rise until next year.

Carney surprised the City when he played down calls for an early increase to rein in the booming housing market when the Bank released its quarterly inflation report this month. "We should remember the economy has only just begun to head back to normal," he cautioned at the time.

Financial markets have priced in a rate rise in March or April 2015, although a move seems more likely in an inflation report month - February or May - when the Bank can use its latest forecasts to explain the rationale for an increase.

Bean, who is leaving the Bank at the end of June after 14 years, told BBC Radio 4's The World This Weekend programme that raising borrowing costs "a bit earlier" than expected would enable the Bank to do it more gradually to minimise the economic pain. He said: "There's a case for moving gradually because we won't be quite certain about the impact of tightening the bank rate given everything that has happened to the economy.

"It might not operate in quite the same way as it did before the crisis. So that's an argument if you like for being a little bit cautious, moving in baby steps to avoid making mistakes. If you want to pursue that strategy you need to start taking those baby steps a bit earlier, otherwise you end up being behind the curve."

His view is shared by some other members on the monetary policy committee, who are arguing that raising rates sooner would lead to a gentler upward slope.

Bean stressed there was no need to raise rates straight away, saying: "Maybe if we nip the recovery too early then we won't see that productivity rebound."

Interest rates were cut to a record low during the global financial crisis. Rising house prices in parts of the UK and other evidence that the economy is recovering strongly have fuelled a debate about when interest rates will go up.

Bean said the lingering economic impact of the financial crisis would mean rates would stay lower than before the credit crunch, settling at about 3% in the next few years.

He flagged up geopolitical risks to the economy including the Ukraine crisis, China's shadow banking system and the possibility of the US Federal Reserve returning to "normal" monetary policy earlier than expected.

Asked about the UK housing market, Bean said authorities were more worried about rising household debt than house prices per se, and the Bank's financial policy committee could step in.

"Where the issues really start potentially being worrying is the accumulation of debt. So if there's signs that banks are making loans to borrowers who may not be able to repay . . . whether those households will be able to keep their consumption up if they borrow a lot, then they are reasons why the Bank's financial policy committee might want to take some action to rein things back a bit."

A fellow former deputy governor Paul Tucker was criticised over the Libor rate-rigging scandal at Barclays and left the Bank last year after missing out on the top job, which went to Carney in July. The Bank was also drawn into the subsequent scandal over banks' manipulation of the foreign exchange markets.

Bean said both were "extremely serious charges", echoing comments made by Carney in March. "Any attempt to manipulate markets - whether it's the interbank market through manipulating Libor, the foreign exchange market through trying to manipulate the fix there - for private gain strikes at the integrity of markets.

"Markets can't function properly if people can't trust the actors involved as intermediaries to ensure they behave in an appropriate fashion." He added: "It certainly speaks to the need to be continually vigilant . . . We need to be much more conscious of the scope for misbehaviour as well as complacent behaviour."



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Source: Guardian (UK)


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