Central Banks

Here's why the Bank of England's hawks are getting it wrong over calls for a rate hike

Key Points
  • Bank of England Chief Economist Andy Haldane said he may vote for an interest rate hike this year, just 24 hours after Governor Mark Carney said "now is not yet the time."
  • The Bank of England's monetary policy committee narrowly voted in favor of maintaining record low interest rates last week.
  • "I don't see it as… 'oh the economy is running so hot and inflation is picking up, we need to raise rates', No, no, no! Is that clear?" David Bloom, global head of foreign exchange strategy at HSBC, told CNBC on Friday.
‘No deal’ Brexit scenario is bad for UK pound: HSBC

Bank of England (BOE) policymakers that are pushing for an interest rate hike have been wrong for the past eight years and there's no sign of them getting it right now, HSBC's global head of foreign exchange strategy told CNBC on Friday.

The June meeting of the BOE's monetary policy committee resulted in a 5-3 vote in favor holding interest rates at record low levels, with Governor Mark Carney and Chief Economist Andy Haldane supporting the majority.

However, a week later and just 24 hours after Carney argued the state of the economy and ongoing Brexit uncertainty meant borrowing costs should remain unchanged; Haldane broke ranks to put himself at odds with the BOE Governor. The chief economist of Britain's central bank suggested on Wednesday that he would soon be in a position to support a rate rise.

"You get the boss speaking one day and then his chief economist the next and saying different things… it feels to the market that the chief economist – Haldane – is heading towards a rate rise. I don't know why, I don't know what they think is happening, I'm not quite sure what this is all about," David Bloom, global head of foreign exchange strategy at HSBC, told CNBC.

"They have been wrong for eight years about this and now they are going to be right? No, no, falling sterling creates inflation, inflation squeezes real incomes, consumption comes down, imports come down and the current account rectifies itself. It's amazing… financial markets can work," Bloom said.

Policymakers 'don't have to act all the time'

Pedestrians walk past the Bank of England in the City of London, Britain June 28, 2016.
Paul Hackett | Getty Images

The BOE's monetary policy committee is at its most divided over interest rates since 2011 and Haldane, previously considered to be one of the most dovish members, has now argued it would be prudent to tighten policy before the end of 2017.

Sterling rose on Wednesday, shortly after Haldane's comments, as investors were forced to reconsider the long-held view that interest rates would remain unmoved until well into 2018.

Bloom bemoaned the "push me, pull you" comments from Carney and Haldane and stressed central banks did not have to "act all the time."

However, departing BOE rate-setter, Kristin Forbes, warned on Thursday that the U.K.'s central bank could no longer justify keeping interest rates at 0.25 percent.

Speaking at the London Business School, she said, "Many of the factors that have justified keeping interest rates at emergency levels over the past few years have become less potent, and sterling's depreciation has fundamentally shifted, underlying inflation dynamics in a way that makes it more pressing to begin this voyage soon."

Conversely, Bloom described sterling weakness throughout Brexit talks as a "safety valve" for the U.K. and argued the Bank of England's more hawkish policymakers should view Britain's weakening currency as part of the solution, rather than as part of the problem.

"I don't see it as… 'oh the economy is running so hot and inflation is picking up, we need to raise rates', No, no, no! Is that clear?" Bloom quipped.

Sterling was trading 0.3 percent higher at $1.2718 on Friday morning though Bloom suggested the U.K.'s currency would continue to weaken throughout Brexit talks.