LONDON (Reuters) - Bank of England rate-setter Gertjan Vlieghe said on Friday that interest rates will probably need to rise once or twice a year over the next few years, comments that are likely to help cement investors’ expectations of a BoE rate hike in May.
Speaking after two of his colleagues on the Monetary Policy Committee split ranks this week by voting to raise interest rates this month, Vlieghe said was he increasingly confident that inflation pressure was building in Britain’s economy.
So long as a strong global economy continues to help Britain shrug off the negative effects of the 2016 Brexit vote, and provided wage pressure continues to grow, then the BoE will need to raise interest rates, Vlieghe said.
“The current central outlook is, in my view, consistent with one or two quarter-point rate increases per year over the forecast period,” Vlieghe said in a speech due to be given to business representatives in Birmingham.
The BoE kept rates steady at 0.5 percent on Thursday but two of its nine policymakers - Ian McCafferty and Michael Saunders - unexpectedly voted for a hike, reinforcing the view among economists that borrowing costs will rise in May for only the second time since the 2008 financial crisis.
Vlieghe said recent surveys and wage data had made him more confident than in previous years that a recovery in wage growth was underway in Britain.
Official data this week showed workers’ overall pay rose at the fastest pace in more than two years in the three months to January.
But Vlieghe said weak productivity growth meant the “new normal” for wage growth was likely to be around 3 percent a year compared with around 4 percent previously.
British government bond futures touched their lowest level of Friday’s session after Vlieghe’s comments. Sterling was little changed.
Vlieghe also said he thought Brexit had probably dampened investment in British companies, although the effect was difficult to quantify.
The world economy picked up pace in 2017 helping Britain to offset Brexit uncertainty. But Vlieghe said the possibility of a trade war had emerged as a new risk to the world economy.
Earlier on Friday, China urged the United States to “pull back from the brink” as President Donald Trump’s plans for tariffs on up to $60 billion in Chinese goods moved the world’s two largest economies closer to a trade war.
Reporting by Andy Bruce; Editing by William Schomberg