Free exchange | Monetary policy

Hawkish tones

David Miles, long thought to be a dove, is now arguing that interest rates should rise sooner rather than later

By S.K. | LONDON

WHEN David Miles joined the Bank of England’s Monetary Policy Committee in August 2009, interest rates were at a record low of 0.5%. They have not budged since. Not once during his tenure, which comes to an end on August 31st, has Mr Miles voted for a change in rates. In his time he has been called a “dove”, and even an “arch-dove”. But in his final speech as a member of the Monetary Policy Committee (MPC) on July 14th, he shrugged off this label, suggesting that rates should rise gradually, but soon.

His speech came on the same day that Mark Carney, the bank’s governor, also suggested that the time for a rate rise is “moving closer”. The governor’s comments caused sterling to jump 0.7% against the dollar.

Most economists have been expecting the Bank of England to wait for America's Federal Reserve to raise rates before taking action itself, for fear of causing a surge in the pound and immediate deflationary pressure. Inflation was exactly zero in June, well below the bank's two percent target. Were the bank to move first and the pound to appreciate as a result, it could be pushed further off-target in the short term.

But the bank has long insisted that the idea it must wait for the Fed is nonsense; Mr Miles reiterated that view. He also dismissed the notion that a small rate rise would plunge the British economy into disarray. A bigger concern, he argued, was that waiting for too long would lead to a steeper path of rate hikes, which households would struggle to cope with. That suggests that if the Fed delays rate rises until December—which looks a growing possibility—the bank could tighten before then.

As well as looking forward, Mr Miles offered lessons from his six years of setting monetary policy. First, inaction is sometimes the best choice. He did not regret his decision to leave rates unchanged, either when inflation was far above its target in 2011 or far below it more recently. Second, macroeconomic theorists and practitioners should move closer together. Whereas theorists get very concerned over deflationary spirals at the zero lower bound, Mr Miles is sceptical that in reality this is a huge danger. Third, we should devote more effort to preventing the next crisis, primarily by increasing the amount of capital that banks have to hold.

Mr Miles will probably have left the MPC by the time rates do finally rise, as the next meeting in August is his last. If he and Mr Carney are the only ones who think that a rate rise is imminent, and if he is replaced by a more doveish thinker, then perhaps the Fed might win the race to raise rates. But given that in the past many MPC members have shown more hawkish tendencies than Mr Miles, his comments could well reflect a broader shift. As the rate-rise chatter in America dies down, Mr Miles is cranking up the volume in Britain.

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