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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."
     "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.
     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
     "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:
[TOPICS: M$B$$$,M$E$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |