MNI: BOE McCafferty: Rates Still Stimulatory After 25bps Hike

By David Robinson

     LONDON (MNI) - A 25 basis point increase in UK Bank Rate would still leave

policy in stimulatory territory and would be equivalent to easing back on the

accelerator rather than applying the brakes, Bank of England Monetary Policy

Committee (MPC) member Ian McCafferty said Wednesday.

     In an LBC interview McCafferty, one of the two members who voted for a rate

hike at the MPC's May meeting, said that his colleagues all accepted that if the

economy evolved as they expected that Bank Rate would have to be increase at

some stage. He said that inflation has held above the 2% target and that the

economy could withstand monetary tightening, with private sector debt having

come down a lot from its peak.

     The headline inflation rate dipped to 2.4% in April but McCafferty said

that the was not convinced it would come down much further and much faster.

     His remarks suggest that he is very likely to again back a hike at this

month's MPC meeting, with the policy decision to be announced June 21. 

     The MPC is set to publish in its August Inflation Report analysis of where

it thinks the neutral rate, the rate that is compatible with stable inflation

when the output gap is closed, is. The working assumption is that the neutral

rate is well below historic levels, but it may be on an upward trend. 

     He rejected the suggestion that reported problems in Brexit negotiations

weighed against tightening, describing the Brexit news-flow as "noise".

     "There is an awful lot of noise that goes on in the public sphere which may

not reflect fully what is being said behind close doors either in Brussels or

here, either within the cabinet or discussing issues with the other 27," he

said.

     He said that from the outset of the Brexit process he had taken the view

that "We won't know what the end state will be until it is really all over ..

nothing will be final until it is all final."

     He said that the MPC was not in a hurry to tighten and that Bank Rate would

only go up to a relatively low level.

     McCafferty was asked about why UK productivity growth has been weaker than

in comparable advanced economies. 

     He argued that the UK had a "lower capital/labour ratio" and for years had

suffered from "lower levels of investment per worker".

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

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