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MPC member warns interest rates to stay low for ‘a very long time’

  • 19/01/2016
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MPC member warns interest rates to stay low for ‘a very long time’
Bank of England rate-setter Dr Gertjan Vlieghe said he was prepared to be ‘patient’ before voting for a rate rise due to the recent slowing in UK growth, weak inflation and stagnant wages.

Vlieghe said the combined effect of these factors alongside further economic influences created conditions which did not warrant a Bank Base Rate increase and could keep rates low ‘for a very long time’.

In his first public speech since joining the Monetary Policy Committee (MPC) in September last year Vlieghe discussed the effects of debt, demographics and the distribution of income on interest rate movements.

Vlieghe said households with high debt levels reduced their spending sharply when the country faced a downturn which made any recessions that followed this build-up in debt more severe and longer-lasting. To tackle this residual debt, monetary policy tended to respond by cutting and keeping interest rates at low levels.

On demographic changes, pointing to a population living longer and having fewer children, and the distribution of income between people of varying wealth, he said more research was needed to understand the interest rate impact.

But, he added, this trio of economic factors could keep interest rates ‘well below their historical average for a very long time’.

He said current economic models did not reflect these changes, but policy makers must not assume that the future will look like the past.

On the prospect of a future rate rise, Vlieghe said: “In order to be confident enough of the medium-term inflation outlook to raise bank rate, I would like to see evidence that growth is not slowing further, and that a broad range of indicators related to inflation are generally on an upward trajectory from their current low levels.”

Inflation, measured by the Consumer Price Index (CPI), rose by 0.2% in the year to December representing a slight increase from the inflation level recorded in November which rose by 0.1%. It is the first month since January 2015 the rate has exceeded 0.1%. The Bank’s target for  CPI inflation is 2%.

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