UPDATE 1-Bank of England's Miles sees strong chance rates will rise before next May - newspaper

Tue Jun 17, 2014 6:19am EDT

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(Updates throughout)

By Ana Nicolaci da Costa

LONDON, June 17 (Reuters) - British interest rates have a strong chance of rising before next May, a member of the Bank of England's rate-setting committee told a newspaper, reinforcing the view that the central bank may still tighten monetary policy this year.

BoE Governor Mark Carney said last week that interest rates might rise earlier than the market had been expecting. That led market participants to bring forward expectations of a rate hike to 2014 from early next year.

David Miles, the most persistent advocate for more stimulus in 2012 and 2013, told the Times that consistently strong growth might have influenced the change in tone.

"I guess until very recently the expectation implied by the short end of the yield curve (was) that the first rise in interest rates might be April or May next year. Clearly there is the chance that the rise will be before that," Miles said.

"Consistently, growth has come in stronger. The longer that lasts, clearly one starts to change one's view of how robust the recovery is and that will affect when you think is the right time to start normalising policy."

Miles said the chance of a rate rise before the end of the year was above the 10 percent probability which markets had previously priced in, which he described as "implausibly low".

Britain's economy kept up last year's strong pace of growth in the first three months of this year, and a record number of people found work in the three months to April.

But subdued inflation has enabled the BoE to keep rates at a record low. Figures on Tuesday showed that annual inflation dropped to 1.5 percent in May, its lowest since October 2009.

Miles said he had no desire to keep up his record of never voting for a change in interest rates - which some in the market took to mean that he was more open to voting for a rate hike.

Minutes from the latest monetary policy meeting are due on Wednesday and investors will scour them to see if more policymakers voted for rate hikes.

The latest change in the Bank's tone comes after its forward guidance had to be adjusted earlier this year because of a surprisingly fast fall in unemployment.

Forward guidance was adopted to manage market expectations without needing to provide more stimulus. The original guidance stipulated that the Bank would not consider raising rates until unemployment fell below 7 percent.

Asked about its credibility in light of those changes - and whether people would pay attention to the BoE's remaining message that any rise in rates will be gradual and limited - Miles defended the policy.

"That first stage of forward guidance served its purpose in heading (off) a risk of a rapid tightening in the stance of policy in the embryonic stage of a recovery. We've gone beyond that now, so it makes sense the message has to change," Miles said.

"The committee can agree that the most likely outcome at the moment is that, when the rate increases come, they are probably going to (be) gradual," he said.

"There is no point in saying definitely because stuff happens that you can't expect - they will be gradual and to a level that is lower than what we used to think of as normal." (Additional reporting by Tasim Zahid in Bangalore; Editing by Larry King)

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