BOE’s Miles Saw ‘Reasonable Case’ for Rate Increase Last Week
2015-08-10 17:57:51.33 GMT

By Scott Hamilton and Jennifer Ryan
(Bloomberg) — David Miles said there was a “reasonable”
argument for the Bank of England to raise interest rates last week in order to avoid faster tightening in future.
“I thought there was a case for beginning the journey now,” the BOE policy maker said in an interview in London on Monday as he explained how close he came to voting for higher borrowing costs at his final meeting on the Monetary Policy Committee. “It was a perfectly reasonable case.”
In the end, only one member of the nine-member MPC, Ian McCafferty, wanted to increase the benchmark interest rate from a record-low 0.5 percent even as the panel projected above- target inflation in three years. Most economists had anticipated that at least one other official would push for tightening.
“Sterling had gone up a bit, oil prices had fallen a bit, there were somewhat ambiguous signals from the labor market, but on balance it was a set of economic news that probably reduced at least the near-term inflation profile by a non-trivial amount,” he said. “For me that was what made the decision ultimately one to keep policy on hold.”
Miles suggested that the decision wasn’t an easy one.
“Ian McCafferty came out on one side of that and I was on the other side, but it wasn’t a compelling clear-cut case one way or the other for me.”
Miles, who joined the MPC in 2009 and is also a professor of financial economics at Imperial College Business School in London, will leave the committee on Aug. 31, to be replaced by Brevan Howard Asset Management economist Gertjan Vlieghe.

Inflation Outlook

Miles, speaking in his office at the BOE, said the date of the first interest-rate increase is less significant than the overall path of borrowing costs. It’s likely that in two to three years’ time, inflation will be around the 2 percent target, spare capacity will be “all but gone,” and the economy will be growing at 2.5 percent to 3 percent a year over that time, he said.
“You might consider that an environment in which monetary policy might move back to a more neutral level,” Miles said.
“Supposing you thought that where you might want to get to, 2 1/2 to three years down the road, is 2.5 to 3 percent on interest rates so you need 200 to 250 basis points of increases in rates and you wanted to grow gradually,” he said. “That’s quite consistent with not immediately increasing interest rates, but at the same time you wouldn’t expect to be waiting around many, many months and well into next year before you started this journey.”
Miles cautioned that delaying in increase might require faster tightening.
“The longer you leave it, the slightly more steep that trajectory becomes,” he said.

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