Economist offers interest rate hint

Tuesday 21 October 2014

The Bank of England's chief economist today gave the clearest indication yet that interest rates are unlikely to rise until the middle of next year as economic prospects have become gloomier.

Andy Haldane's remarks appear to confirm market expectations that the probable timing of a hike has been pushed back from early in 2015 to after the general election.

Mr Haldane told business leaders at a breakfast event in Kenilworth, Warwickshire, that the economic picture has worsened in recent months meaning interest rates "could remain lower for longer".

He was even more explicit on the timing of a hike in an interview with ITV News, telling the broadcaster: "If you believe the financial markets, they're now betting somewhere in the middle of next year. Perhaps that's not a bad bet."

In his speech, Mr Haldane painted a picture of "sunshine with showers" in the British economy, with strong growth, low inflation and soaring employment contrasting with a record six-year squeeze on real terms wages and flat-lining productivity.

The latter more gloomy figures showed "an extended period of agony... virtually unprecedented going back to the late 1800s, with the exception of the aftermath of the World Wars and the early 1970s", he added.

But a separate index of more optimistic indicators would show a reading which had only been bettered in 42 of the past 144 years.

"Rather peculiarly, the UK economy appears to be writhing in both agony and ecstasy," Mr Haldane said.

He acknowledged that, speaking in June, he had been on "the front foot" about raising interest rates sooner but that data now appeared to favour being on "the back foot".

"Put in rather plainer English, I am gloomier," he added.

He said this reflected weaker global growth, greater financial and political risks and weaker upward pressure on prices from wages and world commodity prices.

"Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target."

His remarks come amid burgeoning fears about the health of the eurozone, with ultra-low inflation threatening to descend into a damaging deflationary spiral and the continent's biggest economy Germany apparently on the verge of recession.

Europe is also facing renewed political uncertainty over Greece, where an anti bail-out party has taken a poll lead, as well as the ongoing fall-out from the Ukraine crisis.

Meanwhile the International Monetary Fund has downgraded growth prospects for the world economy.

On the eurozone, Mr Haldane told ITV: "It's a concern. It is our biggest trading partner by far. We know we've seen recently that any event on the continent laps back to the UK very quickly through our trade links but also through our financial links and indeed increasingly just because of confidence. If confidence is ebbing on the continent, it appears to leak across here pretty quickly."