The Business Times

Bank of England may keep rates lower for longer, says chief economist

Published Fri, Oct 17, 2014 · 08:44 AM

[London] The Bank of England may need to keep interest rates lower for longer than previously thought to reduce the chance of Britain's economy slipping into long-term stagnation, its chief economist Andrew Haldane said on Friday.

Haldane said he was now more downbeat about the outlook for the economy, due to weaker global growth, greater financial and political risks and the danger that wages and productivity might continue to fail to recover as forecast. "Put in rather plainer English, I am gloomier," Haldane said. "This implies interest rates could remain lower for longer, certainly than I had expected three months ago." Sterling fell by around half a cent against the dollar after Haldane's speech was released. It also dipped against the euro.

His language marked a sharp change of tone since his last major speech in June, when - in a cricketing analogy - he said he wanted to be on the front foot rather than the back foot when it came to raising rates.

Haldane's remarks come at the end of a week in which markets have pushed back their expectations for the timing of the first BoE rate rise to towards the end of next year against a backdrop of hefty share price falls globally. Last month markets had expected the BoE would raise rates early next year.

Britain's economy was "writhing in both agony and ecstasy", Haldane said in a speech to local business leaders in Kenilworth, central England.

While growth looked set to be the fastest of any major economy this year and inflation and borrowing costs were low, real wages and productivity had endured their weakest run since the 19th century, apart from the aftermath of World War Two.

Although it was possible that wages and productivity would start to pick up as the recovery continued, past BoE forecasts of this had proven wrong and financial markets were increasingly pricing in the danger that growth would falter.

He said that, rather than developing into a normal expansion, Britain could be at risk of "secular stagnation", meaning a very long period of negligible growth. "If there is genuine uncertainty about the path of the economy, the optimal policy response may be to avoid the worst outcomes," Haldane said.

The picture was complicated further by wide divergences in wage trends within Britain.

The number of middle-income jobs had fallen since the financial crisis, and while there were more low-wage jobs than before - keeping unemployment down - real wages from these were no higher than in 1997. By contrast, real wages for the top tenth of British earners were 20 per cent higher than in 1997.

Higher immigration, tougher benefit rules and growing numbers of older people working had all probably put downward pressure on wages for the low-paid, Haldane said. REUTERS

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