Signs that interest rates could rise this year increased after one of the most dovish members of the monetary policy committee made hawkish noises.
In an interview with The Times, David Miles (pictured) suggested he is likely to vote for a rise in rates before his terms ends in 11 months.
‘There was a chance that I would set a record which I had no desire to hold, which is someone who’d done two terms on the MPC and in the whole six years had never voted to change interest rates,’ Miles told The Times. ‘It is not a record I want to set.’
Miles is known for being exceptionally cautious over the economy and called for £25 billion more of quantitative easing 12 months ago to keep the recovery ticking over.
However, the speed of the recovery has surprised Miles, resulting in the change of tack.
‘Consistently growth has come in stronger [than expected],’ he said.
‘The longer that lasts, clearly one starts to change one’s view of how robust the recovery is, and that will affect when you think is the right time to start normalising policy.’
Miles comments come after Bank of England governor Mark Carney said ‘rates could rise sooner than expected’, in his first Mansion House speech last week. ‘We expect that eventual increases in the Bank rate will be gradual and limited,’ he added.
Carney’s comments won support from Barclays: 'In our view, the “gradual and limited” pace of rate increases is consistent with a coordinated policy mix: As the government is committed to intensify fiscal tightening from FY2015-16, a rapid simultaneous monetary tightening would pose big risks to economic growth in the near to medium term.
‘In Carney’s words, “creating the right conditions for investment is essential [for a balanced recovery]”, which would be consistent with monetary policy remaining as supportive as possible, in the form of increasing rates, likely sooner than previously expected, but also more gradually, in order to avoid disruptions.’
But Schroders European economist Azad Zangana pointed out there were a number of caveats in Carney’s speech.
‘Whilst this is the first time that Carney has surprised the market with more hawkish comments, there were plenty of caveats in his speech to lead us to question his position on when interest rates should begin to rise,’ Zangana said.
‘He [Carney] pointed to the ongoing challenges in the private sector and the need for a reduction in household debt, along with the inevitable fiscal tightening that is likely to be stepped up after the general election.
‘He also mentioned the impact of the significant appreciation in GBP, which is likely to reduce the already weak overseas demand for UK exports, and dampen imported price inflation.