Rates expected to rise in “gradual and limited” fashion, says senior Bank official

Sir Jon Cunliffe, Deputy Governor, Financial Stability
Sir Jon Cunliffe, Deputy Governor, Financial Stability
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UK interest rates are expected to rise in a gradual, limited fashion, according to a senior Bank of England official.

Sir Jon Cunliffe, who is a member of the Bank’s Monetary Policy Committee, said he had found a buoyant mood among the businesses he had encountered on a fact-finding trip to Yorkshire and he couldn’t find evidence that the UK had become “a nation of two halves”.

15 December 2015.......   Sir Jon Cunliffe a member of the Bank of England committee that sets interest rates. Picture Tony Johnson

15 December 2015....... Sir Jon Cunliffe a member of the Bank of England committee that sets interest rates. Picture Tony Johnson

However, Sir Jon warned that some firms were worried about skills shortages and regulators were still finding evidence of misconduct among some banks that had occurred after the financial crisis.

When asked when he anticipated interest rates would start to rise, Sir Jon said: “I can’t give you a date. I can tell you what we see in the economy.

“We see an economy that’s growing robustly, relative to the rest of the world. We can see we’ve got disinflationary pressure coming from the rest of the world.

“That’s gone on for longer than we thought..The issue for us is, as that disinflationary pressure moves out of the economy through inflation, how much domestic cost pressure is going to be left?

15 December 2015.......   Sir Jon Cunliffe a member of the Bank of England committee that sets interest rates. Picture Tony Johnson

15 December 2015....... Sir Jon Cunliffe a member of the Bank of England committee that sets interest rates. Picture Tony Johnson

“What we’re looking for really is to see pay move, that’s a really important part of that, we’re looking to see what happens to productivity.

He added: “We’ve seen some progress but it has softened a little bit. We’ll watch the data. People say they’re data dependent; I really am data dependent. I think the next move is up. I think when it comes the movement up will be gradual and it will be limited.

“It won’t go back to the sort of level we saw before the crisis. We’ve been saying that, pretty consistently, for a year or so.

“When we feel there is enough domestic cost pressure in the economy; so that when the disinflationary pressure passes, inflation will come back to the two per cent target. You really have to watch the data.

“Wages are immensely important for two reasons,’’ he added. “One because the forecast we have of what happens in the economy is dependent in a large part on consumers...and consumers can finance some of that consumption through savings, but they really need that increase in pay to do it.

“It’s also important because we need pay pressure to push inflation back up to two per cent.”

When asked if the US Federal Reserve’s decisions had an impact on the MPC’s decision, Sir Jon said: “We look at the UK economy. We look at the pressures in the UK economy. A lot of people say, ‘Well, you have to move when the Fed moves etc..

“But actually there is plenty of historical evidence to show that interest rates in the UK need to follow what’s happening in the UK. So we’ve got the euro area on the one hand, with one sort of monetary policy, and we’ve got the Fed on the other,’’ he said.

“When the Fed are able to raise, and I don’t know if they’ll do it at their meeting tomorrow..when they are able to raise that’s a good sign because it means there’s strength in the US economy. We need strength in the world economy but our decision is pretty much based on what happens here.”

He added: “One of the things that’s impressed me today in Yorkshire is there’s been a buoyant mood. The people I’ve talked to both in manufacturing and services have been much more upbeat than they would have been, say, two years ago.

“I’ve found that confidence elsewhere in the North - in the North East and also across the Pennines in the North West. We’ve seen 11 quarters now of economic growth around the 2.5 per cent mark.

“That’s not just the South East. That’s an economy that’s generally strengthening. Some parts are hotter than others. Some parts are cooler than others.

“But I don’t think it’s a picture of a country of two halves.”

He said people were more confident because they’ve seen more than two years of economic growth.

Sir Jon added: “They’ve seen unemployment come down. We’ve had the fastest fall in unemployment for 40 years between the start of this recovery and the middle of 2013, and earlier this year. They’ve seen the banks get back to a healthier state and be able to extend credit and lend to the real economy.

“Consumer confidence is now pretty high by historical standards across the country,’’ he said. “Most consumers say now is a good time to make a major purchase. Businesses intentions are strong, So I think it’s part of that slow recovery.

“But it’s seven years since the financial crisis; that’s a long time.”

He said people were alive to potential risks in areas such as the emerging markets, but “that said, confidence is high.”

Sir Jon said the banking system had become a lot stronger, with banks holding a lot more capital.

He added: “We were able to go through two stress tests..and the banking system came through showing it could weather stress and continue to lend to the real economy.”

On the issue of misconduct in the banking sector, Sir Jon said: “I think there has been progress. There’s been progress on the regulatory side. We’ve now got a regime that will come in in April, where people at the top of the banks will be held accountable for what happens underneath them. We’ve made progress on pay to some extent, ensuring it can be clawed back if things go wrong after someone has been paid their bonus.

“But is there more to do? Yes, and the culture has to come from the top. We’re still coming across instances of misconduct that happened after the financial crisis.

“So we’re not there yet, but there has been progress.”

“The message I heard most clearly today, and I’ve heard it elsewhere in the country, is around skills, and having the right skills for the future. Companies are starting to invest, and actually a range of companies from manufacturing to services to car auctions are investing in new technology in IT, and are desperate to get the skills they need to carry that through and a lot of concern (has been expressed) about whether those skills are there, and whether we are actually training people for the future.”

He said the firms he had met were enthusiastic about the Northern Powerhouse.

He added: “It’s an idea that’s bringing people together, although it’s quite important that business takes it over and it’s business led.”