BoE's McCafferty reiterates stance on interest rates

Bank of England policymaker Ian McCafferty has reiterated that interest rates need to rise to allow more scope for cuts in the event of a financial crisis.

In a testimony to the Treasury Committee on the hearing of McCafferty’s reappointment to the Monetary Policy Committee on Tuesday, he said there was a need to return the Bank Rate far enough above zero “to a level at which it can be an effective instrument” in tightening or loosening policy.

He said the low interest rate environment has helped keep firms in business that would have otherwise failed. “While this will have had benefits to employment and the broader economy, it has probably led to some low-productivity firms to survive, reducing average productivity levels,” he said.

Last Thursday, McCafferty voted in favour of raising interest rates to 0.75% from 0.50%. He was once again the only policymaker to recommend the move, according to minutes of the MPC’s policy meeting.

The BoE said wages in the UK labour market were rising too slowly for inflation to return to the Bank’s 2% target. The central bank expects inflation will stay below 1% until spring 2016.

The Office for National Statistics on Tuesday revealed the consumer price index fell 0.1% year-on-year last month, compared to analysts’ estimates for a flat reading in line with August. On a month-on-month comparison, CPI also dropped 0.1% in September following a 0.2% increase in August. Analysts had predicted 0% growth.

McCafferty said the possible persistence of low global inflation pressures may generate uncertainties for the economic outlook and for monetary policy.

“Over the longer term, a number of more structural risks and uncertainties raise questions about the long term performance of the UK economy,” he said.

“These include the underlying rate of productivity growth, and hence how fast the economy can grow at full employment, the extent to which a persistent current account deficit might limit the rate of growth through exchange rate instability, and whether the UK economy has sufficient skills to improve competitiveness.”