Vlieghe Says BOE Should Publish Preferred Interest Rate Path

(Bloomberg) -- The Bank of England needs to dramatically revamp a central part of its communications and should publish a preferred interest rate path to improve an “unnecessarily complex” system, policy maker Gertjan Vlieghe said.

The BOE’s current system means that, at times, the growth and inflation forecasts are not consistent with the Monetary Policy Committee’s objectives or intended actions, he said a speech in London. The three-century old central bank has been subject to criticism over its messaging since the financial crisis, leading it to be dubbed an “unreliable boyfriend” by lawmakers. Currently traders are increasingly pricing in a U.K. interest-rate cut, even as officials are signaling that the next move in the benchmark will be higher.

“Publishing an outlook for growth and inflation consistent with the MPC’s best collective view of the preferred path of interest rates would be easier for us to communicate and easier for others to understand,” Vlieghe said. “Though it is neither feasible nor desirable to change our approach overnight, there are merits in exploring whether there are further improvements that we could make.”

Vlieghe, who is viewed as one of the more dovish members of the rate-setting group, used the speech at Reuters to underline his own policy view.

The economic outlook has deteriorated since his last speech in February, with the global environment adding to Brexit headwinds, he said. While U.K. growth data is volatile, and may show stagnation or a slight contraction in the second quarter, he is concerned about the vulnerability of households given the weak savings rate and signs that the labor market may no longer be tightening.

Even so, he reiterated the BOE’s guidance that a smooth Brexit would justify “further limited and gradual rate increases.” Under such a scenario the benchmark “might reach 1% in a year’s time, 1.25% in two years’ time, and 1.75% in three years’ time, with large uncertainty bands around this central path.”

He also highlighted that a rising U.K. rate path would probably require the global economy to “improve from its current weak growth rate.”

In the event of a no-deal departure from the European Union, he said a scenario where the MPC holds or cuts rates is more likely than one in which it raises rates to contain the inflation spike triggered by a drop in the pound.

“It is highly uncertain when I would want to reverse these interest rate cuts, which would either be driven by an improvement in the underlying economy as the disruptive impact of no deal fades, or by upside risks to inflation if the exchange rate and tariff driven boost to inflation puts upward pressure on medium-term inflation expectations,” he said.

In response to questions after the speech, he said that the effective lower bound for U.K. interest rates was now very close to zero and lower than the previous record of 0.25%.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net;Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Fergal O'Brien

©2019 Bloomberg L.P.