Knowing precisely when interest rates will rise is not what really matters, a seniorBank of England official has said, as she insisted its system of “forward guidance” was not failing.
The Bank’s latest forecast signalled the cost of borrowing may not increase for a year, despite the governor, Mark Carney, previously saying the decision would come into “sharper relief” by now.
It suggested that while the UK economy was doing well enough to justify moving away from the record low rate of 0.5% – global instability meant it was not the right time.
The deputy governor defended the Bank’s failure to give any clearer signal as to when that would change and rejected charges it was failing to give promised advance notice.
“No, I don’t think that’s the case. Isn’t it better that the Bank of England give the public and the markets a sense of what our best collective judgment is of what is going to happen in the economy than to catch people by surprise?” Nemat Shafik told BBC Radio 4’s Today programme.
“The consistent message that we have given is that future interest rate rises will be limited and gradual and I think everybody on the monetary policy committee signs up to that guidance and so far that has proven to be right. Even though I understand why people are concerned about the actual date of the first rate rise, what really matters to the economy is the path, and the path will be limited and gradual.
“The report showed that a gently rising path for interest rates would result in the economy moving towards full capacity and inflation coming back to target within a couple of years. The UK economy is still doing quite well: we are growing above trend; real household incomes are growing faster than at any time since the crisis; consumer confidence is strong and investment intentions are robust. But the outlook for the rest of the world is more sombre.”
Shafik also suggested there was no case at present for the policy of “people’s quantitative easing”, advocated by Jeremy Corbyn.
The Labour leader has called for a big boost in public spending on infrastructure, financed by the Bank of England “printing money”, saying that the last round of QE was used to “prop up” failing banks.
Shafik said: “The first round of QE that we did was for the people, it actually raised UK GDP by about 2.5% by our estimates; it brought inflation back up. I think that had huge benefits for the people of the UK. I think at the moment the issue of the day isn’t more QE, the issue is when are we going to tighten. That is what we are focused on at the moment.”
Shafik, the first woman to take the role, did not rule out an ambition to succeed Carney. “I think it’s great that there are more women in senior positions in every area of public life,” she said.