BoE's Vlieghe says rates could rise six times in three years

Interest rates could rise six times over the next three years, one of the most dovish members of the Bank of England’s monetary policy committee told MPs.

In written evidence to the Treasury committee, Gertjan Vlieghe said he expected the economy to keep growing at 1.5% to 1.75% over the next three years so that inflationary pressure will rise even after the effects of the pound’s fall fade.

“My own central projection will require one or two quarter point rate increases per year over the three-year forecast period,” Vlieghe wrote. He said his expectations were stronger than the path of rates derived from market yields at the BoE’s May inflation report, which suggested there would be just under three quarter-point increases in the next three years.

“Provided the headwinds from Brexit uncertainty do not intensify in the near term, and ultimately fade over the coming years, I think policy rates are likely to rise, in my central view, by 25bp to 50bp per year over the forecast period,” Vlieghe said.

The pound rose 0.22% against the dollar to $1.3457 and 0.04% against the euro to €1.1391.

Vlieghe was previously considered to be one of the MPC’s more dovish members. He signalled a tougher approach to monetary policy in March but the BoE has since held back on increasing rates after weak economic figures for the first quarter. Vlieghe voted with the majority as the MPC voted 7-2 to leave rates at 0.5% in May.

Speaking at the committee, Governor Mark Carney said he expected the economy to regain momentum after severe winter weather caused growth to almost grind to a halt in the first quarter.

“There is a lot of residual softness in that first quarter which is why, for me, it makes sense to see if momentum is re-established which I do expect it to be.” Carney said. But he added that the output lost in the first quarter was unlikely to be made up.

Carney said the MPC believed the slowdown was a blip because the BoE’s agents asked “hundreds and hundreds” of businesses if the snow had reduced their output. Many said yes, whereas the Office for National Statistics received few answers when it asked the question when compiling GDP figures, he said.