* 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
* 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 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
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
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)