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Policymaker denies Bank of England underestimated pace of recovery
THERE will be no sudden hike in interest rates the new year even if unemployment falls below seven per cent, a senior Bank of England policymaker told The Northern Echo.
During a fact-finding visit to the region, Ian McCafferty, a member of the Monetary Policy Committee (MPC), denied that the Bank’s so-called forward guidance had underestimated the speed of the recovery and was at risk of failing to react to positive signs of growth, that some commentators fear could fuel inflation next year.
The MPC has said it will only consider lifting interest rates above their historically low level of 0.5 per cent until joblessness drops to at least
seven per cent.
Forecasts had suggested that rates would remain at 7.6 per cent for now, but yesterday’s figures for the quarter to October showed an unexpectedly steep fall, however, jobless rates across many parts of the North-East remain stubbornly high.
Mr McCafferty, while stressing that the seven per cent guideline threshold will not automatically trigger an interest rate rise, acknowledged that unemployment was falling more quickly than the Bank had expected when the guidance was announced in August.
Mr McCafferty, said: "Some people have argued that has made it (forward guidance) less relevant.
"In a period of early recovery, forward guidance has a great deal of merit in helping to sustain and build confidence.
"Some City commentators have been looking at previous relationships between how the economy has performed and when the Bank has lifted
interest rates. They have said that after three quarters of growth we should be expecting to see an interest rate move pretty rapidly in the next few months.
"But the economy is still three per cent smaller than it was in 2008. We want to see consistent, sustained growth for some time in order to allow the economy to restore itself to where it needs to be.
"Guidance is important in not allowing interest rates to rise to early which would head off the recovery."
His remarks added to comments by the Bank’s chief economist Spencer Dale last week that rates would remain low until there was a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher.
The minutes of the MPC meeting earlier this month showed that it expected inflation to fall towards two per cent in the first quarter of next year and later decline further amid a strengthening pound. They also revealed that policy makers continued to believe that a burgeoning recovery was on the way.
In addition, Mr McCafferty said the Bank was mindful that signs of recovery, such as rising house prices and falling unemployment, were less pronounced in areas, such as the North-East, than in the South-East.
"One of the purposes of visits such as my coming to County Durham is that it helps us to learn a huge amount about what is really going on at the sharp end of the economy, and to factor it into our thinking.
"I appreciate that this region continues to face significant challenges, but I have also been heartened by positive news from areas, such as the local manufacturing sector," added Mr McCaffery, a graduate of Durham University, who spent part of his two-day trip hearing how Newton Aycliffe manufacturer Ebac was investing in new production lines to become the UK’s only maker of freezers and washing machines.
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