BoE's McCafferty Says Policy Tightening Nearer

(RTTNews) - A Bank of England policymaker said that the U.K. economy has started to return to normal conditions and the time to end the loose monetary policy is nearing.

"The economy is starting to return to more normal conditions, after arguably the biggest shock in over a hundred years, and we expect this healing process to continue over the forecast," BoE Monetary Policy Committee member Ian McCafferty said in a speech, text of which was published by the bank on Friday.

"As a result, the time of the extraordinary policy stance of recent years is gradually drawing to a close."

This month, the central bank held the key bank rate at a record-low 0.50 percent and the size of asset purchases at GBP 375 billion.

The benchmark interest rate has been at a historic low since March 2009 and the previous change in quantitative easing was an increase of GBP 50 billion in July 2012.

Economists and markets expect the bank to start raising rates in the first half of next year.

McCafferty, along with Martin Weale, had sought a quarter point rate hike in five consecutive rate-setting sessions till December last year.

In the quarterly Inflation Report released in May, the bank suggested that the interest rate would be raised by the middle of 2016 and inflation is projected to return to target within two years.

U.K. economic growth halved to 0.3 percent in the first quarter from 0.6 percent in the final three months of 2014, latest data from the Office for National Statistics revealed.

"With some of the headwinds to the economy...now starting to fade, we are approaching the time when monetary policy will need to begin its journey back to more 'normal' settings," McCafferty said.

"The performance of the economy over the next year is inherently uncertain, so the timing of the first rate rise will depend critically on the signals contained in the economic data over the coming months," he said.

Policymakers will be closely monitoring the economic data, especially the signals from the labor market, to determine the appropriate time for the first rate rise, he added.

In April, U.K. inflation entered negative zone for the first time since 1960 due to falling food and transport costs. Consumer prices fell 0.1 percent after staying flat in March.

Citing the existence of low inflation, and the possibility of its persistence through lowered inflation expectations, McCafferty said the inflation risks lie slightly to the downside.

"This is the key judgment behind the change in my voting position at the turn of the year, as inflation fell sharply," the policymaker said.

"But as the months pass, it is becoming clearer that the risk of a material de-anchoring of inflation expectations is diminishing."