Bank of England: no great urgency in returning interest rates to normal levels

David Miles, Bank of England policymaker, has suggested low inflation means there is no great need in returning interest rates to normal levels from their record low of 0.5%.

Miles, who is an independent member of the Bank’s monetary policy committee, said in his speech to the University of Edinburgh Business School, that lower-than-expected inflation, driven by the rapid decline in oil prices over recent months, meant the committee should be in no hurry to raise borrowing costs.

“I don’t think that lower inflation than seemed likely 6 months ago means that more expansionary policy is now needed; but it does mean that there is no great urgency in starting the process of moving monetary policy back towards a more normal setting,” he said.

His opinion reflected the minutes of the MPC’s January meeting, published on Wednesday, which showed there were no votes for an interest rate rise for the first time since last August. Two hawkish members, Martin Weale and Ian McCafferty, withdrew their support for an increase.

The MPC believes there is an even chance that inflation could drop below zero in the coming months, prompting some analysts to raise fears that the economy is sliding towards damaging deflation. But Miles, an economics professor at Imperial College, London, said:

“This is a long way from the sort of deflation trap that is really worrying. This fall in inflation, rather than increasing the burden of debt in a way that can become self-reinforcing in a downwards spiral, is boosting the disposable income of households and making the burden of debt easier.”

As the European Central Bank prepares to make an injection of its own dose of quantitative easing, following the example of the US, UK and Japan, Miles argued that central banks still have plenty of weapons left, even when interest rates are close to zero.

In his view, QE in the UK had worked partly by prompting investors to shift money into corporate bonds, helping to unblock the dysfunctional credit markets in 2009. Miles also rejected the idea that in the light of the financial crisis, the Bank should be given a broader target, perhaps encompassing growth and unemployment, instead of focusing solely on hitting an inflation rate of 2%.

“There is no inconsistency in setting monetary policy with regard to real things and having a remit in which an inflation target is central – provided that the target does not require you to act like an inflation ‘nutter’, a technical term which I would define as wanting to bring inflation bank to target in the shortest possible timeframe”, he said.