By David Milliken and Andy Bruce
LONDON (Reuters) -The Bank of England is most likely to begin raising interest rates “well into” next year, although a move could come earlier in 2022 if the economy rebounds faster than expected, BoE policymaker Gertjan Vlieghe said on Thursday.
Vlieghe said the very rapid growth and pick-up in inflation due this year as the economy recovers from the COVID pandemic would not last, but modest tightening of monetary policy was likely to be needed to tamp down inflation over the medium term.
Sterling rose by more than half a cent against the U.S. dollar after the BoE published Vlieghe’s remarks from a lecture he is giving at the University of Bath.
Most other BoE officials have been more reticent about the likely timing for interest rate rises. Michael Saunders, another external member of the Monetary Policy Committee, hinted on Monday that a rate rise might be 18 months away.
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Vlieghe – whose term on the MPC expires in August – said he broadly agreed with BoE forecasts published earlier this month, though he thought spare capacity created by the pandemic in the economy would prove harder to use up.
“In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with some modest further tightening thereafter,” he added.
The government’s furlough programme, which pays the wages of more than 2 million workers, does not expire until Sept. 30 and Vlieghe said it would take time for the true health of the economy until early in 2022.
If unemployment in the first quarter of 2021 was low and upward pressure on wages stronger then than the BoE expected, “a rise in Bank Rate could be appropriate soon after, along a slightly steeper path than in my central case,” Vlieghe said.
However, if concerns about COVID infection risks persist – possibly as a result of new variants of the disease – higher unemployment could prove persistent and the economy might need more BoE stimulus.
(Reporting by David Milliken and Andy Bruce)