Rates should stay low for longer, says Bank of England economist

The Bank of England’s Monetary Policy Committee (MPC) should keep the base rate at its record low level of 0.5 per cent for several more months at least, one of its members has said. 

In a speech at the Kenilworth Chamber of Trade Business breakfast, the Bank’s chief economist Peter Haldane said he had been somewhat optimistic about the economy back last summer, during the cricket season. By analogy, he said he felt ready to adopt a “front foot stance” regarding an early rate rise in the first few months of 2015.

However, he said, his position has shifted as it now appears the outlook is less rosy. While acknowledging that a number of factors still look good – a well balanced recovery, annualised growth of over three per cent, low inflation and rapidly falling unemployment – there are three interconnected areas of concern.

These were listed as a continued fall in real-terms pay, low real-terms interest rates for savers and weak productivity; all factors that have the potential to stall economic growth. All this, he suggested, put the economy “on the back foot”. 

The cricketing analogy might be stretched as far as noting that the ‘cut’ is a shot played by a batsman off the back foot. Of course, there is no room for cutting when it comes to rates, but Mr Haldane said they do need to be kept down, arguing that a lack of progress in the three problem areas he mentioned means low rates are needed. Only when these can be solved will an increase be a wise move for the economy.

A focus on the lack of efficiency at companies may indicate how important it is for them to ensure they benefit from good corporate governance, as they will need to make the kind of decisions that improve efficiency to make it possible to increase productivity. On the basis of Mr Haldane’s argument, these can, in turn, make it more feasible for companies to pay their staff more. 

However, other MPC members are more optimistic, including the Bank’s governor Mark Carney.

He told the Trades Union Congress annual conference in Liverpool last month that real-terms growth in pay is likely to emerge from the middle of 2015.

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