BoE's Haldane warns market of rate-hike expectation dangers

Bank of England chief economist Andy Haldane warned that a spike in market expectations for a central bank interest-rate hike may harm the UK economy, against the already challenging Brexit backdrop, and sees inflation above 2% for three years.

Britain's key interest rate is presently at 0.25%, having been cut it to that level in August last year in the wake of the UK's vote in June to quit the EU, sending sterling down, inflation up and tightening consumer spending.

UK's consumer-price index, an inflation gauge, rose to a less-than-expected 1.9% in the year to January, from 1.6% in December. BoE's inflation target is 2%, and is expected to be breached in coming months.

Producer-price inflation surged to 20.5% from a revised previous 17% and well ahead of its 18.5% consensus forecast, the data from Office for National Statistics also showed.

"Inflation is picking up and is likely very soon to exceed its 2% target and to remain above that target for the next three years. This is almost entirely the result of the effects of sterling’s depreciation last year on import prices," said Haldane in a written report to the Treasury Select Committee.

He also noted that growth in the UK economy over the next few years was likely to remain modest, and to slow in the year ahead as households' spending power was eroded by inflation.

Now, Haldane said market expectations for a rate hike might result in tighter credit conditions, harming the UK economy. He was comfortable with BoE's neutral policy stance.

He added that attempting to divine the future course of UK's economy was unusually challenging after the Brexit vote.

"In the current fragile environment, however, I would be concerned if there were to be too sharp a rise in market interest rates, in expectation of Bank Rate being raised in the near future," said Haldane.

"That triple-whammy could cause a sharper slowing in the UK economy than I believe would be desirable from a monetary policy perspective," he said in the statement.

However, speaking before the Treasury Select Committee earlier on Tuesday, Monetary Policy Committee member Ian McCafferty said there was "some hope" interest rates could being to normalise in two or three years.