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BoE’s Charlie Bean expects rates to hit 3pc in three years

by International Commercial Investment on May 26, 2014


Interest rates are likely to rise to 3pc over the next three to five years as the Bank of England adopts a “baby steps” approach to ending a five-year standstill at 0.5pc and raising the cost of borrowing. Charlie Bean, retiring as deputy governor with responsibility for monetary policy, made the prediction on Sunday as he looked back on 14 years at the Bank with a front seat view of the financial crisis and the strains imposed by the recovery. Lord King, meanwhile, the former Governor of the Bank, feels a return to the pre-crisis bank rate average of 5pc-5.5pc he managed would only be more appropriate “in a very long time.” The comment made today was his first on interest rates since his retirement last year. Mr Bean, who spent seven years as the Bank’s chief economist and the last seven in a deputy governor’s seat, told BBC radio that he looking at a shorter time horizon with his own prediction.

He said that rates were likely to “settle at 3pc” between 2017 and 2019. But he claimed there was no immediate need for an increase because there was still slack in the economy to guard against any inflation build-up. He said it was “reasonable to think that because of the headwinds that are still out there, as well as global forces”, the level reached for the base rate in the next three to five years could be two percentage points below the previous 5pc average. Speculation about the timing and size of interest rate movements has been rife and changing since Mark Carney, governor of the Bank, shifted the criteria of his new “forward guidance” policy from the jobless total to wider judgments about the economy. The last meeting of the Bank’s Monetary Policy Committee, the key rate fixing body, showed that -while there was a unanimous vote for no immediate change – there was no consensus about the timing for a policy change.

While all nine members of the Bank’s Monetary Policy Committee (MPC) agreed that rate rises should be gradual and limited, some believed rate rises would need to start sooner in order to fulfil this commitment. “It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy,” minutes of the MPC’s May meeting showed last week.

The minutes stated: “The Committee would continue to refine its views as the economy evolved, and for some members the monetary policy decision was becoming more balanced.” Forecasts have pointed to the first or second quarter next year but Mr Bean favours an earlier movement. 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 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.” This meant starting to take “those baby steps a bit earlier otherwise you end up being behind the curve”. The risk was missing out on badly needed improvements in the economy, particularly productivity. Lord King, the former governor, said that a “normal rate” of around 5pc or 5.5pc is “where we ought to be” in a “very long time”. “We don’t get there by raising rates now, because that will generate a further recession now,” he said.

International Commercial InvestmentBoE’s Charlie Bean expects rates to hit 3pc in three years