UPDATE 1-Bank of England likely to lower estimate of unused capacity - Shafik

Wed Jul 9, 2014 11:01am EDT

Related Topics

* New deputy governor Shafik appears at parliament committee

* Shafik says BoE likely to cut estimate of spare capacity

* BoE plans to raise rates before all spare capacity put to use

* Shafik says productivity and wages will drive rate moves

* Voluntary codes for market benchmarks may be inadequate (Adds quotes, context)

By David Milliken and Tess Little

LONDON, July 9 (Reuters) - The Bank of England is likely to lower its estimate of the spare capacity in Britain's economy next month, incoming BoE Deputy Governor Minouche Shafik said on Wednesday - a sign that an interest rate rise is approaching.

The Bank has said it is watching spare capacity closely as it weighs up when to start raising rates from their record low of 0.5 percent, and that it plans to raise rates before the unused capacity reaches zero.

It is due to publish its next quarterly Inflation Report on Aug. 13.

In its last two quarterly Inflation Reports, the BoE estimated the slack in the economy was equivalent to between 1 and 1.5 percent of gross domestic product.

Shafik said she believed Britain's productivity gap - the disparity between the number of people in work and the output they produce - was mostly structural, rather than an effect of the country's recession and recovery.

That might suggest to some investors that she does not think the BoE has much time before it needs to raise rates to avert the risk of inflation picking up.

But Shafik, speaking at an appointment hearing before the Treasury Committee in Britain's parliament, said the outlook for productivity was uncertain.

"If we can start to see improvement in productivity numbers, rates can stay lower for longer. If we don't, we'll be facing supply pressure and price pressures, and rates will have to go up," she said.

"The question about the recovery in productivity is really central to whether this recovery will be not just a good one, but a great one."

Shafik stuck closely to positions expressed by other top officials at the BoE.

She said the Bank would look to see if private-sector wage growth was rising faster than the historic trend when deciding whether to raise interest rates, but wage growth was only one a range of indicators it would consider.

Shafik also said it was right for the BoE not to start selling government bonds acquired under its 375 billion-pound ($638 billion) quantitative easing programme until interest rates were high enough to be cut again if needed.

Shafik, who joins the BoE on Aug. 1 from the International Monetary Fund, will be a member of its monetary and financial policy committees.

Her appointment was announced in March as a part of a shake-up by Governor Mark Carney, who wants the Bank's interest-rate setting and surveillance of the banking sector to be more joined up, reflecting its new, broader powers.

Shafik said recent housing market measures taken by the BoE were aimed at pre-empting the development of a "worrying bubble" and she reiterated the BoE's view that interest rates should not be the main tool for controlling housing.

Shafik was born in Egypt and holds U.S. and British nationality. She studied development economics and worked at the World Bank and as the top civil servant at Britain's overseas- aid department before becoming a deputy IMF managing director.

One of Shafik's first tasks will be to handle the fallout from the alleged manipulation of London's currency market by foreign exchange traders, something about which BoE staff may have been aware.

She told Wednesday's hearing that there were reasons to believe that voluntary codes around the setting of benchmarks in financial markets was inadequate. ($1 = 0.5877 British Pounds) (Writing by William Schomberg; Editing by Larry King)

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