UK Economy

Bank of England must not fall behind curve on rates - McCafferty

LONDON (Reuters) - The Bank of England must not get behind the curve when it comes to making its first interest rate hike since before the financial crisis, policymaker Ian McCafferty said on Tuesday.

Ian McCafferty, Monetary Policy Committee member of the Bank of England speaks during a Reuters interview at the Bank of England in London February 24, 2014. REUTERS/Suzanne Plunkett

McCafferty, the only member of the Monetary Policy Committee who is currently voting for higher interest rates, showed no sign of softening his stance in a speech about improving credit conditions for businesses.

He said the neutral interest rate -- which is the level of interest rates consistent with the economy growing at its trend rate and with stable inflation -- will likely have risen gradually by 2017 as headwinds to the economy fade.

“If we on the MPC (Monetary Policy Committee) are to achieve our ambition of raising rates only gradually, so as to minimise the disruption to households and businesses..., we need to avoid getting ‘behind the curve’ with respect to the neutral rate,” he said at a speech at Bloomberg’s London headquarters.

“And for me, that provides an additional justification not to leave the start date for lift-off too late.”

Despite more than two years of strong economic growth, the Bank of England has signalled it is in no rush to raise rates and eight of the nine members of the MPC have continued to vote to keep rates at their record low of 0.5 percent.

Financial markets currently price in a British interest rate hike only around the end of next year, but economists polled by Reuters mostly think the BoE will move early next year.

BoE Governor Mark Carney has said a decision on a rate hike will become clearer around the turn of the year.

McCafferty said tight credit conditions for companies had “diminished markedly”, with small firms broadening their sources of finance away from banks while big companies were turning to capital markets.

The British government’s push to eliminate the budget deficit and sub-par growth in the global economy would continue to weigh on growth. But improving business finance was supporting the normalisation of the economy, he said.

Last week, another MPC member, Kristin Forbes, said a slowdown in China and other emerging markets should not block a rate hike.

Other policymakers have shown little enthusiasm for higher rates, with inflation around zero and some indicators of British economic growth cooling recently.

Deputy Governor Ben Broadbent told Reuters last month he was not close to voting for a rate hike, a view shared by new MPC member Gertjan Vlieghe.

(Reporting by Andy Bruce, editing by William Schomberg); +442075423484; Reuters Messaging: