November 24, 2015 / 10:12 AM / 4 years ago

HIGHLIGHTS-Bank of England policymakers speak after inflation report

LONDON, Nov 24 (Reuters) - Bank of England Governor Mark Carney and some of his fellow policymakers are answering questions from members of Britain’s parliament about the central bank’s latest projections for the economy.

Below are some of their comments.

APPROPRIATE TIME FOR RATES TO INCREASE

“The question in my mind is when is the appropriate time for interest rates to increase and that is strongly consistent with the strength of the domestic economy.”

WILL BE APPROPRIATE TO TIGHTEN MONETARY POLICY

“We will, as the economy progresses, as it’s appropriate to tighten monetary policy, which personally I think it will be appropriate, we will undertake limited, gradual rate increases and we will get the bank rate to a point from which we could cut it if it became necessary to address a conventional economic cycle and we wouldn’t necessarily have to resort to unconventional policy.”

ENSURING CASH IN CIRCULATION BACKED BY GILTS

“The Bank was in a process prior to the crisis of gradually increasing the proportion of gilts it held so that notes and coins in circulation were backed by gilts ... I think we would be very likely to take a decision to finish that.”

BOE TO HOLD CONSIDERABLY LESS THAN 375 BLN STG OF GILTS

“Demand for liquid reserves has obviously gone up in the banking system. Satisfying that through central bank reserves and those being backed by gilts would be appropriate as well. It would be considerably less than the 375 (billion) though.”

NO NEED FOR NEGATIVE INTEREST RATES

“I don’t think the most likely scenario is that the equilibrium interest rate in the United Kingdom is negative and therefore we need effectively to have negative interest rates.”

REAL UK EQUILIBRIUM RATE

“I do think that the real equilibrium interest rate in the United Kingdom has turned positive and as some of the headwinds ... reduce, it will in most likelihood continue to rise.”

GLOBAL EQUILIBRIUM INTEREST RATES

“I do think that global equilibrium rates are likely to be lower than historic averages for a considerable period of time.”

LOW INTEREST RATE ENVIRONMENT

“One of the concerns in a low prolonged interest rate environment, in which we are clearly are, and are likely to remain for some time, even with limited and gradual rate increases it still will be a relatively low interest rate environment.”

HOUSING MARKET AN ISSUE FOR FPC AND MPC

“(The housing market) is clearly an issue for the FPC (Financial Policy Committee) as well as the MPC (Monetary Policy Committee).”

OPEN QUESTION WHETHER PRODUCTIVITY SLOWDOWN WILL HAPPEN

“It is a key assumption in the forecast that there will be this mild deceleration in the rate of productivity growth before it picks back up again. I would say that it is an open question whether this will actually happen.”

PRESSURE ON HOUSEHOLDS BECAUSE OF DEBT BURDEN IS SIGNIFICANT

“More indebted households are more vulnerable and while the level of household debt has fallen notably over the course of the last five years, it is still at very elevated levels and we don’t necessarily see it reducing further. In fact as we have just been discussing we can see an uptick largely due to dynamics in the housing market, so you are absolutely right, the pressure on households because of the debt burden is significant.”

LESS MARGIN FOR ERROR FOR FPC GIVEN WEIGHT OF HOUSHOLD DEBT

“I’m not speaking about the specific set of decisions the FPC has to take in the short term, but as a general factor in terms of the orientation of the FPC, the concern is that, yes, there is less margin for error given the weight of household debt that still exists in this country. We are very conscious of that at the FPC.”

RISK TO UK PRODUCTIVITY FORECAST IS TO THE UPSIDE

“I would say the risk to this assumption is to the upside, in other words that productivity growth could well be higher than we have assumed and in that case this would imply, all else equal, a bit more slack in the economy. But all else is not necessarily going to be equal.”

IMPACT OF FALLS IN ENERGY PRICES

“From the perspective of the current conjuncture, and the impact on British households, the net impact of these falls in energy prices is to reinforce the growth in incomes and as a consequence we have the highest growth in real incomes since the crisis.”

CHANGES IN LABOUR MARKET “HOLLOWING OUT” MID-SKILLED JOBS

“(There are) changes in the labour market which do have an impact in terms of ‘hollowing out’, that’s a strong term, but we do see the proportion of medium-skilled jobs and the challenge is that those individuals quite often have to compete for lower-skilled jobs.”

FX APPRECIATION MORE COMPLICATED THAN ENERGY PRICES

“We by and large look through those energy prices, we have a more complicated judgement to make around the implications of pass-through from higher exchange rate and foreign disinflation and we do that by setting the horizon over which, we wish to return inflation to target we have adjusted that slightly given the persistence of pass-through work done by professor Forbes and others at the bank recognising the degree of pass-through and also the persistence, we’ve adjusted the horizon to around two years, instead of within two years.”

PRESSURE ON CENTRAL BANK INDEPENDENCE

“In terms of pressure on central bank independence around the world, I would say that pressure has increased in recent years. It’s entirely appropriate that central banks are subject to intense scrutiny given the scale and the importance of their responsibility, but I would suggest that given the burden that has been placed on monetary policy in particular since the crisis there have been some tendencies towards challenging that independence.”

ANTICIPATED EFFECTS OF ACCOMMODATIVE UK MONETARY POLICY

“I think we need to be a bit careful, the low level of bank rates, it is very low by any historical metric, is it significantly accommodative? I think we need to be a bit cautious about that, we have an economy that is growing at around trend. If we thought rates were significantly below some equilibrium level we would expect an economy to be growing above trend and rising. We have an economy that is growing at trend and, if anything, slowing down a touch. If monetary policy is very accommodative, we’d expect pricing pressures to be picking up a at a rate of knots. There is not a huge amount of evidence of pricing pressures picking up very significantly.”

PERSONAL LOAN GROWTH PICKING UP AT A RATE OF KNOTS

“On unsecured debt, by which I mean not so much credit card debt as personal loans, that is picking up at a rate of knots.”

WE ARE NOT IN A DEBT-FUELLED BOOM

“We’ve seen the cost of those loans fall very significantly actually over the course of the last year or two, that would be ultimately an issue that the FPC might want to look at pretty closely and I’m sure it will.

“All I’m saying is that at a household level that aggregate credit growth, both secured and unsecured, isn’t yet at levels that I think would cause us to say ‘oh this is a debt-fuelled boom’. That’s not the way I would read the current numbers.”

HOUSING MARKET NOT RACING AWAY

“I don’t see at the moment the housing market racing away, I see it picking up pace relatively steadily.”

RISKS SKEWED TO DOWNSIDE

“I see the balance of risks around UK GDP growth and inflation as skewed materially to the downside, more so than embodied in the November 2015 Inflation Report. There are of course also risks to the upside, but I consider these to be both more modest in scale and somewhat easier to cope with should they occur.”

GERTJAN VLIEGHE, EXTERNAL MEMBER, MONETARY POLICY COMMITTEE:

POCKETS OF OVERHEATING

“If you have concerns about a very isolated sector then that’s a prime candidate for a macro-prudential measure but if you see little pockets of overheating and there are more and more across the economy then increasingly that’s telling you that this is no longer a macro-prudential issue, it’s a monetary policy issue. We’re very well aware of not falling into the trap of using that wrong instrument and so far it’s only ever been about isolated pockets.”

IDEA OF “HELICOPTER MONEY” HAS PROBLEMS

“I also think there are really big problems with helicopter money or cancelling gilts or whatever you want to call it, because it is essentially us saying that we are abandoning our inflation targets and that is not something for us to decide because we have been tasked with meeting the inflation target.”

ABOLITION OF CASH “INTERESTING IDEA”

“For me reductions in interest rates and further asset purchases are the first line of defence, the next tools we go to ... The abolition of cash is an interesting idea when thinking about how electronic payments might naturally evolve over the next few decades, it is not a policy measure for the Bank of England to implement it. You cannot hold cash so that we can reduce interest rates further.”

KIRSTIN FORBES, EXTERNAL MEMBER, MONETARY POLICY COMMITTEE:

SHOULD START TO SEE NEUTRAL INTEREST RATE PICK UP

“We should start to see that neutral interest rate begin to very gradually pick up naturally.”

NEUTRAL INTEREST RATE

“We don’t fully understand where the neutral interest rate is today.”

NEXT INTEREST RATE MOVE WILL BE UP

“Given the state of the UK economy, a solid recovery, I still believe certainly the next move in interest rates will be up, we will not require loosening.”

EVIDENCE THAT QE LESS EFFECTIVE IS WEAK

“There is some very weak and mixed evidence that QE maybe became less effective but the evidence in the academic studies I’ve seen suggests that is because QE was most effective initially because of the contraction in markets and markets weren’t functioning well.”

EVIDENCE IS OF QUITE A TIGHT LABOUR MARKET

“First, a number of measures we look at of labour market tightening are elevated and above pre-crisis levels, for example vacancies are above pre-crisis levels, vacancy-unemployment ratio is around pre-crisis levels, a bit above. Short-term unemployment is lower than before the crisis. Some other measures of tightening in the labour market are a bit below pre-crisis levels. For example, job-to-job moves are still slightly below pre-crisis levels. But all in all the evidence is of quite a tight labour market. And also there is quite a bit of data collected by agents across the country, and that shows quite a bit of tightening in specific labour markets.”

LABOUR MARKET PRESSURE SUPPORTING CASE FOR RATE RISE

“So this is something we are very much watching closely, movement is in the direction of a tightening labour market, building inflationary pressure, supporting the case at which we would need to be raising interest rates sooner rather than later.”

BUT PRESSURES NOT YET AT APPROPRIATE LEVEL FOR RATE RISE

“But the cost price pressure to date is not yet sufficient to be consistent with inflation heading back towards the 2 percent target. So that’s basically what we are focusing on.” (Reporting by William Schomberg, Sarah Young, Lisa Barrington, Li-mei Hoang and Estelle Shirbon)

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