Bank of England could raise interest rates next spring, says MPC member

MPC member Ian McCafferty says market expectations rates could rise in the second quarter of 2015 are 'not unreasonable'

A Bank of England policymaker has reinforced expectations that the first rise in interest rates will come as soon as next spring, in remarks that pushed up the pound.

Ian McCafferty, a member of the monetary policy committee, said that market expectations that the Bank of England will start to raise rates in the second quarter of 2015 are "not unreasonable". He told news agency Reuters in an interview that wage deals in coming months would be "quite critical" as policymakers watch for inflation risks.

Under governor Mark Carney, earlier this month the Bank overhauled its forward guidance policy on when rates would rise from their record low of 0.5%. At the time it said a view in markets that rates could rise in the second quarter of 2015 was consistent with its goal of keeping inflation close to the government-set 2% target. McCafferty told Reuters: "In that sense, you'd have to say that that market curve is not unreasonable.

"The exact timing of course is going to depend on events that have yet to unfold in terms of how the recovery proceeds over the course of the next six to 12 months or so."

Following his remarks being published, the pound rose to session highs against the dollar and euro.

McCafferty, a former chief economic adviser to business group CBI, said he was watching for pressures on inflation from pay deals negotiated in coming months. After years above its target inflation has now fallen below 2%, to stand at 1.9% in January.

"I suppose my view would be if anything, the risk I am watching for, because I think it fits with our mandate, is were we to see inflation risks or inflation behaviour start to develop," he said. "At the moment, that seems to be well under control.

"If we did see some inflationary pressure – more than we currently expect in our central case – that would if anything, I suspect, lead the committee to consider slightly earlier rate rises."

The policymaker said another factor to watch was the strength of the pound, which last week strengthened to a four-year high against the dollar.

"Were it to continue to rise, I would get more worried," McCafferty said, and indicated further strengthening could delay a rate hike.

"It's clearly a consideration in terms of total monetary conditions in the economy so we would need to take it into account when determining what the appropriate monetary stance would be going forward," he said.

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UK unemployment rate falls to 7.1%

Jobless rate falls to within whisker of Bank of England's forward guidance threshold for considering interest rate rise

The Bank of England sent a clear message that it has no immediate plans to raise interest rates, despite a shock fall in the unemployment rate close to the level at which the Bank said it would consider a hike.

Policymakers sought to ease fears of a rise after Britain's jobless rate fell sharply to 7.1% in the three months to November from 7.4%. It was a far bigger drop than economists were expecting, with most forecasting a modest fall to 7.3%.

Ian McCafferty, a member of the Bank's rate setting Monetary Policy Committee (MPC), said that although economic recovery was underway and unemployment was falling, inflation was back at the Bank's 2% target, easing the pressure to raise rates.

"It is therefore worth restating that the 7% unemployment level is only a threshold, not a trigger, and that the MPC sees no immediate need to increase interest rates even if 7% were to be hit in the near future," he said in a speech in Nottingham on Wednesday evening.

His comments reiterated those in the minutes of the MPC's January policy meeting, which showed there would be no rush to raise rates. The committee said that when the time did come to raise rates, it would do so "only gradually".

It suggested it would not raise rates until the Bank it had seen a pick up in wages growth and a more established recovery. Economists including those at the EY Item Club are not expecting a hike before mid 2015. Interest rates have been at an all-time low of 0.5% since March 2009.

"By then, we expect the recovery to have broadened out into exports and investment and real wages should be growing again. The consumer needs that time to get its breath back following all the heavy lifting undertaken in recent quarters," said Andrew Goodwin, senior economic adviser to the Item Club.

When the Bank's governor Mark Carney announced the introduction of so-called "forward guidance" on rates last summer, he was not expecting the jobless rate to fall to 7% until 2016. The Bank has since updated its view, but its most recent forecast suggested the rate would not be reached until the second half of 2015. In reality it now looks possible it will fall to that level next month.

Economists said the Bank's next move would most likely be to announce a change to its forward guidance policy when it next updates its forecasts in the February inflation report, possibly by lowering the threshold to 6.5% unemployment and introducing a supplementary wage rise measure.

"Overall we gain the impression that the MPC does not want to raise rates soon and that (perhaps) it will bring its unemployment threshold down, possibly next month," said Philip Shaw, economist at Investec.

The total number of people out of work in Britain fell by 167,000 to 2.32 million in the three months to November according to the Office for National Statistics data.

The number of people claiming jobless benefits in the UK also fell by 24,000 to a near five-year low of 1.25 million in December.

The employment minister, Esther McVey, said: "It's clear that the government's long-term economic plan to get people off benefits and into work so they can secure their future is proving successful."

Employment meanwhile jumped by 280,000 to 30.15 million – the biggest quarterly rise since records began in 1971 – driven mainly by a rise in people with full-time work.

Commenting on the increase, David Cameron said: "More jobs means more security, peace of mind and opportunity for the British people."

Despite the rise in employment, wage growth was flat at 0.9% between September and November, less than half the current 2% rate of inflation. People in the UK earned £447 a week on average in November, before tax and excluding bonuses. People worked an average 32.2 hour week over the three months, compared with 31.1hours in the previous quarter.

MPC members said the slow pace of wage growth in the UK appeared to reflect weak growth in productivity, the January minutes showed.

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