UPDATE 1-Bank of England's Bean: expectations for interest rate rises "reasonable"

Sun Jun 29, 2014 7:21am EDT

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LONDON, June 29 (Reuters) - Market expectations of a rise in British interest rates at the turn of the year are "reasonable", Bank of England policymaker Charlie Bean told Sky television on Sunday.

Bean, a deputy governor who is due to leave the bank at the end of June, was asked about the path of interest rate rises implied by financial markets.

He described expectations of an interest rate rise by early next year as "reasonable" and said longer-term expectations also looked in line.

"The market has rates going up to 2.5 percent over the next three years. That seems like broadly sensible judgement," Bean said in an interview.

The Bank of England has kept interest rates at a record low 0.5 percent for more than five years.

Last week the BoE's head Mark Carney described market expectations that rates will be around 2.5 percent in three years as "not inconsistent" with the economy returning to form.

Bean was also asked whether rates could eventually return to pre-crisis levels around 5 percent.

"I wouldn't want to say it will be back there in 10 years, but I think it's plausible over the very long run... that these headwinds will abate," he said.

Bean also said that when interest rates do eventually begin to rise the bank could, at the same time, start unwinding the programme of buying British government bonds it undertook between 2009 and 2012 to keep borrowing rates low and stimulate economic recovery from the financial crisis.

"I think it will be natural either at the time the MPC (Monetary Policy Committee) raises bank rates, or some time shortly thereafter, to say 'OK, we won't reinvest maturing gilts'," he said. He cautioned that demand could be "restrained" when the programme is unwound.

The BoE purchased 375 billion pounds ($638 billion) of British government bonds between 2009 and 2012 and has reinvested cash from the maturing gilts in its stock to maintain it at that level. ($1 = 0.5877 British Pounds) (Reporting by William James; Editing by Ruth Pitchford)

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