THE new chief economist at the Bank of England has sought to reassure households and businesses that forthcoming increases in the cost of borrowing will be gradual.
In his first major interview since taking on the role, Andy Haldane told The Yorkshire Post that even when interest rates do rise, they will not reach average levels of the past.
Sterling strengthened to a near five-year high against the dollar this week as Britain’s improving economic fortunes increased speculation about an imminent hike.
Mr Haldane said the UK economy is “at the sweetest spot we have felt for quite a number of years” with growth broadening across regions and sectors and a double-digit bounce in business investment.
Regarding a rate rise, he said: “When it does come, whatever the first letter of the month that that happens to be, it’s going to be gradual.”
He added: “The new normal won’t be rates where we thought about them in the past. It is going to be closer perhaps to that 2-3 per cent range.
“Navigating that path won’t be easy. We haven’t been here in the 320-year history of the Bank of England.”
The Monetary Policy Committee dropped base rate to the historic low of 0.5 per cent in 2009 in an emergency response to the global financial crisis.
Its average has been 5 per cent over the last three centuries.
Mr Haldane said: “I understand the sense of trepidation around that, interest rates prospectively on the rise, but this will only happen when we are really confident that the economy can take it.
“In that sense, the return of interest rates to normality ought to be something to applaud and take comfort from because this is the mirror image of the economy having repaired itself.
“Right now, there aren’t signs of strong inflationary pressures, there aren’t any signs of strong wage pressures, which is why we are in no rush and when the rate rises eventually come they can afford to be gradual.”
If the Bank’s base rate were to rise by 2 per cent, it could add more than £110 to the monthly £500 payment on a £100,000 mortgage.
The housing market revival is at the heart of the economic recovery with prices accelerating nearly 10 per cent over the last year, according to latest official figures.
But in London prices were up nearly 19 per cent, fuelling fears over a housing bubble in the capital.
The chief executive of upmarket housebuilder Berkeley Group suggested this week that London should probably have its own higher interest rate.
Mr Haldane said: “There is only one interest rate we can set and and it is the interest rate for the UK and we should set that interest rate with an eye to the whole of the UK.
“Now, any change in any policy tool does affect different people in different ways, different sectors in different ways and different regions in different ways.”
He said the Bank has plenty of analysis available to help it understand the impact of a rise on households, businesses and financial markets.
Top economist inspired by ‘fabulous’ teacher at Leeds comprehensive
Time Magazine named Andy Haldane as one of the 100 most influential people in the world, but the new chief economist at the Bank of England was in no doubt who inspired him.
It was Peter Bates, who taught him A-level economics at Guiseley School, a former comprehensive on the outskirts of Leeds.
“He was fabulous,” said Mr Haldane in an interview with The Yorkshire Post.
“This was early 80s. It was grim. There was that massive unemployment problem. He brought that to light. That’s what made economics interesting for me.
“It really mattered. My friends had fathers who were unemployed off the back of this. It was really for real. And public policy was really for real, really early on.”
Mr Haldane, whose father played trumpet in orchestras, went on to read economics at Sheffield University and joined the Bank of England in 1989.
He said: “I have done 25 years at the Bank this year.
“Throughout that time, whether it’s falling out of the exchange rate mechanism, or starting inflation targeting, or central bank independence, or the Asian financial crisis, or the global financial crisis, or now back to monetary policy, they have all been massive events that have really affected people and if public policy and central banks can do just a bit to head that off and make it a bit better then what could be better than that?”
Mr Haldane cut his teeth on monetary policy in the fall-out from Britain’s exit from the ERM in 1992, helping to design the inflation-targeting network.
He rose through the ranks at the central bank and in 2009 was appointed executive director for financial stability.
The 46-year-old has become a key figure in the battle over financial regulation and attracted headlines in 2012 when he said the Occupy protest movement was correct in its attack on the global financial system.
The Bank of England was given extra powers following the 2008 financial crisis in an attempt to prevent a future meltdown of the banking system.
Mr Haldane said: “The new Bank is all about joining together the monetary policy side of things and the financial system side of things.
“One of the great intellectual and operational errors that we made pre-crisis is that we didn’t join together those pieces sufficiently.”
He started his new job as chief economist three weeks ago, following in the footsteps of Mervyn King and Charlie Bean who both held the post. He has also joined the Monetary Policy Committee, which meets every month to set interest rates.
His teacher Mr Bates is thought to have retired and was yesterday unavailable for comment.
Paul Morrissey, headteacher at Guiseley School, told The Yorkshire Post: “It is fantastic to hear of Andy’s success and that he has achieved one of the highest offices in his chosen profession.
“We are delighted that Andy was so inspired by the teaching he received at our school and this is of particular credit to the record of Mr Bates while he was teaching with us.”
Bank improves communication skills
The Bank of England is doing more to communicate its policy intentions, according to Andy Haldane.
He said the Bank innovated under previous Governor Mervyn King but has “taken things on to the next level” under Mark Carney, who joined last July.
Mr Haldane singled out the policy of forward guidance, introduced last August, which he said is helping firms plan and contributing towards their willingness to invest.
He said business investment is up 8-9 per cent on last year with business intentions at very strong levels.
Mr Haldane added that the Bank’s twin financial and monetary policy committees are holding joint meetings to gain an understanding of any emerging risks in the housing market.
“We have said the FPC’s macro-prudential tools would be brought to bear first. And that the MPC’s tools would be a last line of defence in response to those risks,” he added.