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A Bank of England former policymaker says the central bank doesn’t truly understand the UK economy

  • On the eve of an expected rate hike by the U.K. central bank, David Miles, a former member of the BOE's monetary policy committee, said that low inflation, among other factors, has "bedeviled" the bank over the last few years
  • "So in a world in which you don't really understand quite the structure of the economy, to say 'well, we are going to have a plan for interest rates and stick to it,' I think it's pretty unwise to be honest with you," Miles told CNBC

A former member of the Bank of England (BOE) told CNBC it's "unwise" for the central bank to stick to a long-term policy strategy in case it gets wrong-footed by new economic data.

On the eve of an expected rate hike by the U.K. central bank, David Miles, a former member of the BOE's monetary policy committee, said that low inflation, among other factors, has "bedeviled" the bank over the last few years.

"I think it's genuinely difficult to work out what you might call the sustainable rate of output and unemployment," he told CNBC Wednesday. He explained that the BOE used to think that an unemployment rate of 4.5 percent would boost wages. However, the rate of unemployed people in the U.K. is below that level and yet wage growth has remained muted.

"So in a world in which you don't really understand quite the structure of the economy, to say 'well, we are going to have a plan for interest rates and stick to it,' I think it's pretty unwise to be honest with you," Miles told CNBC.

The Bank of England is expected to announce the first rate hike in a decade on Thursday as inflation remains above its 2 percent target and economic growth has surprised and proven more resilient after last year's Brexit vote.

Governor of the Bank of England Mark Carney hosts a quarterly Inflation Report press conference at the Bank of England in central London, Britain August 4, 2016.
Justin Tallis | Pool | Reuters
Governor of the Bank of England Mark Carney hosts a quarterly Inflation Report press conference at the Bank of England in central London, Britain August 4, 2016.

Samuel Tombs, chief U.K. economist at Pantheon Macro, believes that the BOE will likely not unanimously vote to hike.

"Its new medium-term inflation forecast will be lower than in August. As a result, we think that the MPC will drop its guidance that interest rates could rise to a greater extent than markets anticipate," he said in a note Monday.

Market expectations point to another rate hike of 25 basis points next year and a gradual tightening over time