BoE's Cunliffe senses 'change in the air' over long-term rates
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By David Milliken
LONDON (Reuters) - Sterling's slide since Britain voted to leave the EU makes it harder to keep interest rates at a record low and the factors that have pushed down borrowing costs so much might be starting to ease, Bank of England Deputy Governor Jon Cunliffe said.
There was "a sense of change in the air", Cunliffe said in a speech on Wednesday, as global market interest rates and inflation expectations continued to rise in the wake of Donald Trump's election as U.S. president.
"To the extent that they presage longer-term changes in economic policy, they could perhaps affect the natural rate of interest and perhaps even the longer-term trend rate," Cunliffe told an audience at the University of Manchester.
The BoE cut its main interest rate to a record low 0.25 percent in August after Britain's vote to leave the European Union and signaled another cut was on the way if growth weakened as expected.
But on Nov. 3 it shifted to a 'neutral' stance on future moves due to greater inflation pressures as the fall in sterling increased the cost of imports. Since then, the election victory of Trump and his promises of higher spending have pushed up inflation expectations around the world.
British finance minister Philip Hammond is likely to increase investment spending in a budget statement next week although he has said the changes are likely to be modest.
Cunliffe echoed comments by BoE Governor Mark Carney who told British lawmakers on Tuesday that politicians were engaging in a "massive blame-deflection exercise" for holding central banks responsible for ultra-low interest rates.
Instead, the fall in interest rates reflected 30 years of changes such as weakening productivity, an aging population and reduced public investment, Cunliffe said.
"Some reversal in that trend internationally would be likely to push up the trend rate of interest. It might also help raise the rate of growth of productivity," he said.
Faster productivity growth, higher investment spending and a shift in China to more consumption-led growth could all potentially contribute to a rise in long-term interest rates in Britain, as well as shorter-term borrowing costs, Cunliffe said.
For now, the British economy probably still needed interest rates to be negative in 'real' or inflation-adjusted terms, Cunliffe said. But sterling's sharp fall since Britain voted to leave the European Union made this a trickier decision.
"The exchange rate shock has made it more difficult for policy to follow the natural rate," he said.
"The policy rate may need to depart from the natural rate if the policymaker is faced with a shock that creates a trade off – for example between bringing inflation to target and smoothing output volatility," Cunliffe said.
(Reporting by David Milliken; Editing by William Schomberg and Raissa Kasolowsky)
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