The Bank of England should start moving away from its “emergency” approach to monetary policy by reining in support for the housing market and lifting interest rates “sooner rather than later”, Standard Life Investments (SLI) has urged.
Although the fund manager said the central bank should raise borrowing costs later this year if spare capacity in the economy continues to shrink, it noted that “difficult decisions” will have to be made in returning to a normal policy setting.
Its intervention came the day after minutes of the Bank’s monetary policy committee (MPC) showed members at its June meeting were “surprised” that financial markets believed the chances of a rate hike this year were relatively low. Many economists now believe base rates will rise above record lows of 0.5 per cent as early as November.
James McCann, UK and European economist at SLI, said: “With the current recovery proceeding impressively and property markets accelerating, we believe that the Bank should flex its muscles sooner rather than later. Indeed while it is not yet time to remove the punchbowl of accommodative policy, it looks increasingly appropriate to water down this intoxicating mixture.
“The Bank can lead with macroprudential measures in the first instance, but should raise rates later this year if spare capacity continues to shrink and financial conditions do not tighten sufficiently.”
MPC member Ian McCafferty said yesterday that economic data over the next few months will have a critical influence on when the Bank will raise interest rates, adding to signals that such a move is possible before the year is out.
Bank governor Mark Carney noted in his Mansion House speech last week that an increase “could happen sooner than markets expect”.
McCafferty stressed that he did not want interest rates to rise rapidly, and that increasing rates earlier rather than later was one way to do this, describing it as “an additional reason not to hold back too long”.
He added: “It will be critically important that rises in bank rate are delivered, as far as we are able, at only a modest, gradual pace.”
SLI’s McCann supported that view, adding that the Bank’s financial policy committee could also help with the return to normality by recommending that the UK government’s Help to Buy scheme is reined in, while other tools – such as loan-to-value limits for mortgages – could be introduced to help head off a house-price bubble.
He said: “By starting early and moving gradually the Bank would be in a stronger position to calibrate the pace and scope of tightening. There is growing evidence that the MPC is moving in this direction following the Mansion House speech by Carney, left. We would urge the committee to follow through on this signal, with the balance of risk pointing to a gradual move away from an emergency policy setting.”