Sir David Ramsden, who recently joined the Bank of England as deputy governor for markets and banking, and is a member of the Monetary Policy Committee (MPC), has revealed why he voted against the majority of his colleagues and opposed an interest rate rise last month.
The Bank of England voted on 2 November to double the UK base rate to 0.5 per cent. The nine-person committee voted by a majority of 7 to 2 to raise rates for the first time since the financial crisis, with Mr Ramsden being one of the dissenters.
In a speech at King’s College London on 20 November, Mr Ramsden outlined his reasons for voting against the majority view.
He said the job of the Bank of England, when setting interest rates is to find an appropriate “trade-off” between controlling inflation at or near the central bank’s 2 per cent target, and helping the government of the day grow the economy and reduce unemployment.
Mr Ramsden said the Bank of England cannot fully mitigate the consequences to the UK economy of the country’s exit from the European Union.
He said he takes a different view on the outlook for the UK economy than do many of his colleagues in the Bank of England.
Mr Ramsden implied that if the Brexit vote had not happened, and the UK economy had grown in line with the bank’s pre-Brexit forecasts, then a rate rise might have been appropriate.
But he said the productivity, GDP growth, wage growth, business investment, are all lower than the central bank’s pre-Brexit forecasts.
Mr Ramsden said the relative resilience of UK economic growth since the EU referendum vote has been a pleasant surprise, particularly as the extra demand that has been in the economy has been in previously under performing areas, a rebalancing he thinks will be healthy for the UK economy in the long-term.
But he said the extra demand created in certain areas of the economy does not make up for the demand lost in other areas.
Mr Ramsden’s view is that for an interest rate rise to be justified right now, total (what economists call aggregate) demand should be higher than it is now, for the inflationary pressures in the economy to be entrenched enough to justify an interest rate rise.
He said he expects the UK economy to be 2 per cent smaller in 2020 than the Bank of England had forecast for it to be prior to the Brexit vote.
David.Thorpe@ft.com