Posted on Friday 7 March 2014 by Ulster Business

Bank of England

The Bank of England’s chief economist has assured businesses in Northern Ireland that the central bank will be taking no chances with the recovery.

Speaking to Ulster Business on a recent visit to the province, Spencer Dale said the business community need not be fixated on when interest rates would start rising, because when they do they will rise slowly and remain low for some time.

Mr Dale, who also a member of the Bank’s Monetary Policy Committee, said he “did not have a crystal ball” and so would not be drawn on when the cost of borrowing would be raised from its historic low of 0.5%, where it has been since March 2009.

“One of the messages I have been stressing, the key message from the MPC to the business community is that we’re not going to take risks with this recovery. What we have said in terms of interest rates is that we think there’s still some spare capacity in the economy, unemployment is still too high, too many people who want to work longer hours can’t. So we want to keep stimulating the economy before we raise interest rates,” he said.

“Interest rates will rise at some point, but when we do raise them we will do so gradually and cautiously because we want to keep on nurturing this recovery. The other point to stress is that when we do start to raise interest rates they are likely to remain low relative to what they were historically. Before the financial crisis the interest rate set by the bank averaged about 5% for ten years. Even though some of the headwinds from the financial crisis are likely to ease they will persist for some time, so the level of interest rates appropriate to keep the economy growing, keep inflation close to target, will be way below that 5% for some time to come,” he added.

“So don’t fear the interest rate rise, it’s not happening yet and when it does it will be gradual and cautious and interest rates are likely to remain low for some time to come.”


Mr Dale, who is responsible for the Monetary Analysis & Statistics Divisions of the Bank of England, said he did not believe Northern Ireland is lagging behind the rest of the UK, noting that the general economic trends in Northern Ireland were much the same as other regions.

“The broad temperature take is very similar to the UK economy as a whole, which is that this is an economy that’s growing. We’ve had three or four incredibly frustrating years where things were tough but for most of the businesses we’ve spoken to, they’ve turned a corner, things are improving, their order books are growing and their output is growing,” he said.

“I don’t think the South East of England is typical of the rest of the UK. If you look at the UK as a whole, my sense is that Northern Ireland is not a million miles away from the others. There are some parts where it is growing less quickly but the broad patterns of recovery are similar,” he added.

Mr Dale visited five different businesses and held four meetings with groups of business people while in Northern Ireland, engaging with over 150 business representatives over two days.

“The businesses that are doing well are those with a strong export focus, those who are looking outside the UK, particularly if they’re exporting to non-traditional areas, not just to the Euro area but to the Far East, the Middle East. You see that in mainland UK and also here. In that sense some of the perceived difference people here see with the rest of the UK, I see it less so.”

The economist cited the ongoing uncertainty in the Euro area as the biggest risk to the recovery, although he noted some near term pressures have eased.

“The challenges facing them in terms of the need to rebalance, of the competitiveness in peripheral countries relative to the core countries, are big challenges. They are our main trading partner and if that doesn't go as well as hoped that could have a significant impact,” he said.


After a period of stability in the housing market, concerns have been raised in the past few months that house prices have started to rise again too rapidly. That prompted the Bank to announce in November that it was scrapping the part of its Funding-for-Lending scheme that supported mortgage lending.

Mr Dale said that while the Bank is conscious of the risk of the housing market overheating, he believes the Bank’s Financial Policy Committee has the necessary tools to keep it under control.

“We had a housing market that was flat-lining for several years. House prices were flat, transactions were at a low level. We’ve started to see some warming up of the housing market and that’s good news for UK plc. A healthy housing market is good for our economy. It helps the construction sector, it allows greater labour mobility, it helps consumer confidence. That’s welcome,” he said.

“But any of us know that you can go from a healthy housing market to an overheating market very quickly. Our job is to worry and we do worry. The one thing I would stress that is different now from in the past is that we’re better equipped to deal with housing risk than we were in the past,” he added.

“Interest rates are a pretty blunt instrument. The FPC have far better instruments to manage those risks. We do worry but I think we’re far better equipped to manage those risks than in the past.”

Mr Dale said that while the Bank was conscious of the unique banking challenges in Northern Ireland, he believes that access to finance, which has hindered both the housing market and business growth, is now less of a problem.

“My interpretation for Northern Ireland and the rest of the UK is that the ability for companies and households to access credit has improved. One of the reasons the Northern Ireland housing market has stabilised is that levels of activity in the market have picked up because people’s ability to access mortgages has improved. That’s a good sign, a good news story. The main issue remains around the ability of smaller companies to access credit. My sense is that things are better than they were a few years ago but they still need to improve.” 


The Bank and other economists have also expressed caution about the recovery because it has until now been largely driven by consumer spending. Mr Dale reiterated that it is now up to businesses to start investing in order to maintain the momentum.

“One of the messages when we published our inflation report earlier this month is that the recovery we’ve seen up to now has been heavily driven by increased consumption, households spending more, and also the improving housing market buoying construction. Those two things together have been entirely responsible for the growth we’ve seen in the past year. That’s what you’d expect in the early stages of recovery,” he said.

“But what we need to see is that baton of growth handed on from consumers to businesses, so they go out and invest. That would support the durability of the recovery going forward. I think there is good reason to think that will happen. The levels of business investment are very low at the moment but many businesses have pretty healthy balance sheets and have held off from making investments in recent years, so they have opportunities if they want to take them. As the economy grows and confidence improves, you’d expect to see that happening.”

With inflation recently falling back to the Bank’s target level of 2% for the first time in years, attention has started to turn to another risk to economic growth – deflation. But Mr Dale believes the focus should be on the positives of low inflation.

“The big news story for inflation is that for the past four or five years inflation has been significantly above its target. That has directly affected the quality of the standard of living for many households. Many people haven’t had pay rises and those that have maybe had 1% or 2% at most. That’s squeezing their real income. Nearly every family has suffered a squeeze in their living standard, the good news is inflation has come back down to target. As a result that pressure has fallen. We will keep an eye on that. Our job is to keep inflation close to target and we worry about undershooting it as much as overshooting. But the good news is it is back to target for the first time in years,” he said.

“My job is to worry. Our central view is for inflation to remain close to target for the next couple of years. I’m almost certain that our central view won’t transpire, events will happen and it will move away. The risks around that are pretty evenly balanced, so we’ll be wrong, we just don’t know exactly how we’ll be wrong.”


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