(Adds comments from Bean, background)
LONDON, May 25 (Reuters) - The Bank of England’s plan to increase interest rates only gradually may mean it should move earlier than would otherwise be the case, a top policymaker at the central bank said.
But BoE Deputy Governor Charlie Bean also told BBC radio that there was no need for an immediate rate rise and policymakers had to be careful not to nip the economic recovery too soon.
The BoE has held its Bank Rate at a record low of 0.5 percent for more than five years to help Britain’s economy recover from a deep recession caused by the financial crisis.
Bean, who is due to retire next month, said Bank Rate could settle at about 3 percent in three to five years’ time, below its pre-crisis average of about 5 percent, echoing comments from other BoE policymakers.
The BoE has signalled it might start raising rates in about a year’s time. However, in a sign of growing differences about the timing of when to start reining in the recovery, it said last week that some of its top officials believed the case for keeping rates on hold was now more finely balanced.
Britain’s economy is growing at an annual rate of about 3 percent, making it the fastest among the Group of Seven countries although it is only now recovering its size before the financial crisis.
Bean said the BoE wanted to raise rates only gradually because it was uncertain about the impact on the economy after the upheaval of recent years.
“It might not operate in quite the same way as it did before the crisis. So that’s an argument if you like for being a bit cautious, moving in baby steps to avoid making mistakes,” he told the BBC in an interview.
“But of course if you want to pursue that strategy, then that would say, well, you need to start taking those baby steps a bit earlier, otherwise you end up being behind the curve.”
Bean said there were “equally arguments on the other side” about the risk of raising rates too early and jeopardising a recovery in productivity which the BoE is hoping to see in order for Britain’s economy to grow without fuelling inflation.
“It may be that if we nip the recovery too early then we won’t see that productivity rebound. So that’s an argument on the other side of the fence.”
Asked about the housing market recovery, which has raised concerns about a new property bubble especially in London, Bean said the BoE’s Financial Policy Committee - which meets in June - was more focused on the risks of a big debt build-up than about price growth which reflected the lack of home-building.
“We are certainly monitoring developments in the housing market pretty closely,” he said.
Bean also said it was important that regulators responded to the “extremely serious charges” that foreign exchange traders manipulated currency rates.
The BoE suspended an official in March as part of an investigation into whether its staff turned a blind eye to the alleged rigging.
“We need to be much more conscious of the scope for misbehaviour as well as complacent behaviour,” Bean said. (Writing by William Schomberg; editing by David Stamp)