Interest rate rise would undermine recovery, warns MPC member

The cost of credit should remain low until living standards begin to rise, despite fall in unemployment rate, Paul Fisher says

A leading Bank of England policymaker warned on Thursday that a rise in interest rates risked undermining th erecovery and the cost of credit should remain low until living standards begin to rise.

Paul Fisher, a member of the central bank’s monetary policy committee (MPC), joined Threadneedle Street’s verbal offensive to protect low rates after official figures revealed a dramatic fall in the unemployment rate to 7.1% in November.

Fisher said the central bank was likely to keep rates low despite unemployment nearing a threshold of 7% because unemployment was still “elevated”.

The BoE introduced a policy of forward guidance last year that tied a review of its interest rate policy to a fall in unemployment to 7%. At the time unemployment was 7.8% of the workforce and officials expected the target to be reached in 2016.

Analysts now expect unemployment to fall to 7% in the next few months and there is considerable pressure from the City and pension savers for a hike to boost returns.

Speaking only a day after his colleague Ian McCafferty highlighted the risks of increasing rates while the recovery remained fragile, Fisher said it was crucial that policymakers saw a sustained recovery before raising rates.

He said: “Even if the 7% unemployment rate threshold were to be reached in the near future, I see no immediate need for a tightening of policy. The MPC has been clear all along, that upon reaching the 7% threshold we will have to consider what the medium-term pressures on the economy are and make an appropriate judgement about the direction and pace of policy, and any further guidance that we may choose to issue in future.”

He said there was a need for a rise in productivity to generate growth rather than just an expansion of the workforce.

He said: “[Rising productivity] ultimately drives real national income per head and hence how well off we are as a country. So we need to see rising employment accompanied by even faster growth in output.”

BoE officials are concerned that many people have switched from full-time well-paid jobs to self employment following redundancy.

Howard Archer, chief economist at IHS Global Insight, said: “It is very evident that the MPC is looking to take every opportunity to ram home the message that interest rates are unlikely to rise anytime soon. MPC members are also stressing that when interest rates do eventually start to rise, they will do so only gradually.

“While the Bank of England has always stressed that an unemployment rate of 7.0% is not a trigger for an automatic interest rate hike but a threshold for considering whether interest rates are at an appropriate level given the overall state of the economy, it is now really looking to ram this message home.

“This was evident in the minutes of the January MPC meeting which stated that ‘members saw no immediate need to raise Bank Rate even if the 7.0% threshold were to be breached in the near future’.

“The minutes further commented that it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained. Consequently, when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.”

The Bank could cut its threshold for a rate rise to 6.5% unemployment, matching the policy adopted by the US Federal Reserve. Archer said this move could undermine faith in the consistency of central bank policy, but may be considered worthwhile if it convinces businesses to use low interest rates to invest more in new plant, machinery and technology to improve productivity. © 2014 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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