A TOP Bank of England official yesterday launched a staunch defence of governor Mark Carney’s forward guidance policy, claiming that markets were “spectacularly misguided” if they think interest rate rises are around the corner.
Monetary policy committee (MPC) member David Miles said that he was more confident about Britain’s recovery prospects than at any time since he joined the central bank in 2009, but stressed the rebound had some way to go.
The “forward guidance” policy was launched last month, with the bank pledging not to consider a rate hike until unemployment has fallen to 7 per cent from its current level of 7.7 per cent – barring a spike in inflation.
It aims to give households and businesses the confidence to spend, safe in the knowledge that rates will stay low for around three years. But markets have been pricing in a much earlier rise amid a barrage of upbeat economic data.
Figures yesterday from the British Bankers’ Association (BBA) showed that lending to small and medium-sized companies was stable last month, following recent declines, fuelling hopes that banks are now becoming more prepared to lend to businesses.
Miles, right, one of nine members on the MPC, told an audience at Northumbria University in Newcastle that rate hikes would derail Britain’s “embryonic” recovery.
He said: “I am now more confident that we are on the path to recovery than at any time since I joined the MPC in the first part of 2009.
“What a potentially self-confirming and stronger path for output and confidence does not need right now is tighter monetary policy.”
He said Britain would need a long stretch of above-average growth to fill slack in the economy, meaning a steeper fall in the jobless total is unlikely.
Miles pointed to huge numbers of workers who have been forced to take part-time work but want to work more – meaning a lot of slack in the jobs market.
He said the tightening of financial conditions since August, while not helpful, was “benign” because it reflected better economic prospects, and he rejected the criticism as a “rather Alice in Wonderland, upside down logic”.
“It implies that somehow the MPC find unwelcome signs of a recovery in the economy. I can assure you that we do not,” he added.
Until recently Miles had been calling for a further dose of quantitative easing to help stimulate lending but changed his tune as signs of a recovery grew.
His speech echoed a defence of forward guidance by fellow MPC member Ben Broadbent on Monday.
Commenting on the BBA lending figures, IHS Global Insight economist Howard Archer said: “If the UK can sustain a decent level of economic activity, it seems highly likely that demand for credit will gradually pick up.”