BoE’s Vlieghe sees rates rising in 2022 if economy recovers

BoE policymaker Gertjan Vlieghe said that the Bank of England could raise interest rates as soon as the first half of next year. This is if the job market bounces back faster than expected, but it is more likely to wait until later in 2022.

Sterling strengthened against the dollar and euro. After Vlieghe’s remarks, the British government bond yields rose. These are the most explicit to date about when the BoE might start to reverse pandemic-era stimulus measures. Vlieghe broadly agreed with BoE forecasts that point to growth of 7.25% this year. This took place earlier this month. After a government furlough program that ends on Sept. 30, he even thought that unemployment could prove higher than forecast.

In an online lecture to students at the University of Bath, he said that in that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, and also added that there could be some modest further tightening thereafter. The BoE might need to move sooner, if the labor market proved stronger than expected in the first quarter of 2022. He said that this could provide a clear view of the post-furlough unemployment and wage dynamics.

Another external member of the Monetary Policy Committee, Michael Saunders said that a rate rise might be 18 months away. Vlieghe would no longer be on the MPC when rate rises were under consideration. This was confirmed directly by himself in a session. His external MPC membership will expire this August and that can never be renewed. But some speculations say that Vlieghe could successfully seek to the BoE’s current chief economist Andy Haldane, who is stepping down.

The BoE forecasts headline consumer price inflation will exceed 2.5% by the end of the year. This is due to a range of one-off effects related to the pandemic. Price pressures will be muted in the longer-term and this reflects a return of subdued wage growth before the pandemic. Vlieghe said that if the Covid infections persists, then higher unemployment could prove persistent and the economy might even need more BoE stimulus. He added that negative interest rates at that point will absolutely become a relevant and important tool.