Bank of England's chief economist sounds cautious note on interest rates

Bank of England chief economist Andrew Haldane on Friday sounded a cautious note on interest rates.

He said interest rates could move in either direction as policymakers weigh up a weaker post-Brexit pound against, rising inflation expectations and recent stronger-than-expected economic growth.

Haldane said the sharp fall in Sterling since June’s vote to leave the EU would likely have a significant impact on growth and inflation over the coming year.

The BoE expects inflation to exceed its 2% target next year, but the central bank has said it has limited tolerance how much it can go.

“A further large upwards shift in expectations from current levels would, I think, be less benign and possibly unhelpful, especially if it were expected to persist,” Haldane said. “On the downside, I think there is still a material chance that growth could underperform relative to expectations during the course of next year.”

The BoE slashed interest rates in August to a record low of 0.25%, the first cut in more than seven years, signalling further loosening was possible in the wake of Brexit.

However, Haldane said interest rates are so close to zero that it would be difficult to cut them much further to provide extra stimulus if the British economy slows unexpectedly.

“So this is a material risk, for monetary policy and for the economy, which needs to be weighed in the setting of policy,” he said. “My personal view is that this provides grounds for not proceeding too hastily with any tightening of the monetary policy stance.”