Bank of England deputy urges caution on interest rate rise

A Bank of England deputy governor has signalled he is unlikely to vote for an interest rate rise while wage increases remain more subdued than the Bank’s forecasts.

In a speech in Cumbria, Jon Cunliffe said the lack of strong wages growth meant there was a case for “stodginess” or caution before raising interest rates, leaving him isolated on the nine-strong monetary policy committee.

The MPC meets next month and is expected to increase the base rate from 0.5% to 0.75% after hawkish speeches by the Bank’s governor, Mark Carney, and its chief economist, Andy Haldane. Other members of the committee have indicated their readiness to raise rates.

A poll of City analysts by Reuters has given an 80% probability of a rate rise in August.

Many high street lenders have already put up their loan rates after forecasts of a rise in May, but the MPC scuppered the move, saying a delay was needed to assess the damage to growth from bad weather in March.

Cunliffe said: “[Caution is] the policy strategy that best and carefully nurtures the slow healing that I now believe is increasingly taking hold.”

He added: “Looking to the medium term, there remains a case for a little ‘stodginess’ yet.”

Cunliffe, one of two MPC members who voted against the rate rise in November, said the economy appeared to be growing about as fast as the Bank predicted in May, but that wages growth had slipped and was not rising at the 3% annual rate forecast.

He said the UK, along with many other western economies, remained deeply affected by the 2008 financial crisis and an ageing population that had led to a huge accumulation of savings. The growth of savings denied economies vital funds for consumer spending and investment, a process economists have dubbed “secular stagnation”.

He told the Cumbria chamber of commerce in Kendal that while fears of secular stagnation were probably exaggerated, the economy needed a long time to heal. A tighter monetary policy would potentially harm that healing process.

In the three months to April, the jobless total dropped by 38,000 to 1.42 million, to leave the unemployment rate at 4.2%, the lowest since 1975.

Despite the fall in unemployment, earnings growth including bonuses went into reverse, dipping by 0.1 points to 2.5%, while earnings growth excluding bonuses dropped by a similar amount to 2.8%.

A new monthly update on the UK’s GDP by the Office for National Statistics found the economy was running at a faster pace in May than the beginning of the year after a rise in average quarterly growth from 0.1% to 0.3%.

More optimistically, the National Institute of Economic and Social Research said the recovery could continue over the coming months, with a forecast for growth reaching 0.4% in the three months to June, giving a boost to MPC members keen to increase rates.