The Bank of England’s new chief economist will tell a group of Scarborough business leaders that the decision on how to play the recovering UK economy is in the ‘corridor of uncertainty’.
Andrew Haldane will give the speech at tonight’s Scarborough Business Ambassadors meeting at The Spa.
The Yorkshireman, who is also a member of the influential Financial Policy Committee (MPC), will reiterate Governor Mark Carney’s claim that interest rates could rise in December, months ahead of schedule.
In his speech he will say: “Over 1.5 million jobs have been created in less than three years.
“Unemployment has fallen from a peak of 8.4 per in 2011 to 6.6 per cent today.
“It is expected to fall further, to below 6 per cent by 2017. Over the same period, inflationary pressures have abated, with inflation falling from a peak of 5.2 per cent in 2011 to 1.5 per cent today, below the Bank’s 2 per cent inflation target.
“The Bank’s forecasts suggest it is likely to hover around that target in the period ahead.
“This turnaround in the economy has prompted an active debate about when the Bank’s monetary policy stance should be shifted from back foot to front - in other words, whether and when UK interest rates might rise.
“Market expectations of future interest rates have already adjusted since the economy began growing.
“In January 2013, the first rise in UK interest rates was expected in the third quarter of 2015. Now, it is expected by the end of this year.
“This prospect has sent shivers down some spines. But some context is important here.
“When the first rate rise does come, it will be because the economy has recovered sufficiently to thrive on smaller doses of monetary medicine.
“A normalisation of interest rates would signal the economy having returned to the hospital ward, after six years in intensive care.
“The economy would be switching channels, from ER to Casualty. That is something to welcome, not fear.”
He says that due to the nature of the financial crisis the economy is entering an uncertain period when it starts to rebound.
“Having never previously been this low, it is inevitably uncertain how the economy will respond when interest rates do begin to rise,” he adds.
“Various surveys have sought to shed light on how UK homeowners may fare. For example, the Bank’s NMG survey from 2012 found that a one percentage point rise in interest rates could result in almost half a million households with a mortgage needing to take corrective measures. This rises to a million households for a two percentage point rise.
“A more timely guide may come from recent US experience. In the middle of last year, long-term US interest rates rose by around one percentage point on the expectation of a tapering in US monetary policy – the so-called ‘taper tantrum’. This had a striking impact on the US housing market, with housing sales 7 per cent lower than a year ago and residential investment falling in each of the last few quarters.
“This raises the possibility of borrowers reacting more sharply to rate rises now than in the past.”
He says the MPC now faces a decision about whether to be aggressive, or to play it safe, if the coming months and years.