Bank of England’s Minouche Shafik’s take on UK Interest Rates

Hawks and doves.

Those are the types of categories used to describe the members of the Bank of England’s Monetary Policy Committee (MPC)…the group of people who meet for two and half days every month to decide the official interest rate in the United Kingdom.

Hawks tend to vote for tighter monetary policies, which can often result in raised interest rates. Doves are not as severe, leaning towards quantitative easing practices that avoid jeopardising the economic recovery of the nation.

So when the new Deputy Governor of the Bank of England Minouche Shafik was asked to describe whether she was a hawk or a dove, this was her interesting response:

“I asked my children this question and they said, ‘Mummy, you should say you’re an owl’,” said Shafik to The Yorkshire Post. “Look at the data, try and be wise.”

Looking at the data is something that the Egyptian-born Nemat ‘Minouche’ Shafik has great experience in, having been the deputy managing director of the International Monetary Fund prior to her current role at the Bank of England.

And in commenting on whether or not interest rates would be raised, Shafik pointed to the encouraging 3.2% rate of economic growth and said:

“The recovery is encouraging. The real question is how can we make this recovery sustainable. We don’t want to take risks with this recovery. It’s been a long recession and I think that’s going to be the biggest challenge going forward.”

This dovish response is probably reflective of the fact that one of Minouche Shafik’s responsibilities is the unwinding of the Bank of England’s grand-scale £375 billion asset purchase programme…a scheme created as a way of injecting money into the economy to keep it afloat.

The MPC as a body has stated that any interest rate increases will be “gradual and limited” if possible, a notable statement in the light of the fact that interest rates have been on hold at 0.5% since March 2009.

From the Deputy Governor’s perspective, the key seems to lie in the relationship between wages increases, productivity and the threat of inflation:

“If wage increases are expected but productivity is performing well we can wait for longer; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up. I think that’s the key choice that we face.”

Eschewing both hawkish and dovish responses, Shafik stated that wage increases without rethinking business models or redesigning work would at best be unsustainable, and at worst be highly inflationary.

So in true owl-like fashion, the new Deputy Governor – and businesses around the country – will be monitoring the data and trying to be wise.

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