MNI: BOE Cunliffe: Infla At Target On Market Rate Expectations

By David Robinson

     LONDON (MNI) - Bank of England Deputy Governor Jon Cunliffe said Thursday

that if Bank Rate rises as gently as markets are expecting, inflation will

return to its 2.0% target.

     Cunliffe told BBC radio that household debt servicing costs are low by

historic standards and that it would take an extra 200 basis points of

tightening, lifting Bank Rate to 2.5%, to get them back up to the average in the

decade before the financial crisis. 

     Money markets are only assuming some 75 basis points of tightening, with

Bank Rate rising to around 1.25% over the next two to three years and Cunliffe

said that scale of tightening would get inflation back to the 2% target.

     The BOE deputy governor said that the Bank had found that people with debt

service costs around 40% of income or above had typically got into trouble when

interest rates rose, but that the proportion of households with these types of

debt service costs was low compared to pre-financial crisis levels.

     Cunliffe said "that it would take something like a 2% increase in interest

rates just to get back to the levels we saw between 1997 and 2007."

     --HIKES GRADUAL, LIMITED

     "We have said that we think interest rates will rise over the next year. We

have said that they will rise in a gradual way but also that they will rise in a

limited way. I wouldn't expect them to rise to those 4-5% numbers that we saw

before the crisis," he added.

     The Bank's May Inflation Report showed inflation back around target in two

years' time on the subdued tightening path implied by markets.

     "The financial markets are assuming that interest rates go up by another

three quarters of a percent or so over the next couple of years. We do our

forecasting on the basis of where the financial markets have those interest

rates and we think we have inflation at target at those sorts of levels,"

Cunliffe said.

     A rate hike in August is seen as more likely than not, but Cunliffe gave no

indication of which way he is inclined to vote at that meeting.

     His media interviews followed the publication of the Bank's Financial

Stability Report Wednesday. The Bank used that report to put the spotlight on

the challenge of rolling over financial contracts with European Union entities

after March 2019 when the UK leaves the European Union, with uncovered

derivative contracts a particular concern.

     --BREXIT CONCERNS

     The UK government has created a temporary permissions regime which is

designed to allow EU institutions to continue to service UK policyholders in the

absence of an implementation period.

     The EU has not made a matching offer and Bank officials have been publicly

calling on Brussels to come up with something similar to the temporary

permissions regime. The BOE's argument is that it will not be possible for

financial sector firms to sort it out on their own in the time available by,

say, transferring business to within the EU.

     The European Banking Association has called on financial institutions to

step up preparations for no Brexit deal, but the Bank wants the EU to get

involved.

     "The EBA's approach, the approach of the European Union has been that firms

themselves can solve these problems by shifting their contracts from UK firms to

European Union firms. I have to say that with the experience and knowledge that

we have of the wholesale financial markets with large amounts of derivatives

contracts it is difficult to see how that is going to be possible between now

and March," Cunliffe told Sky News.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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