BOE’s Bailey Says He Favors Moving Rates Gradually

(Bloomberg) -- Bank of England Governor Andrew Bailey said he favored moving interest rates gradually instead of delivering an unexpected shock to get inflation under control.

The central bank on Thursday lifted borrowing costs to 0.5%, with Bailey voting with a 5-4 majority for a quarter-point increase. Other members of the panel sought to deliver a bigger hike that would have been unprecidented for at least the last quarter century.

“I am in the 25 camp because I think it's wise to take it in steps,” Bailey said in an interview with Bloomberg Television. “The case for 50 is clear. But for me the 25 call was not a close call. It's about how to operate in a period of uncertain monetary policy.”

He also said there's no target yet for where the central bank's balance sheet should end up once asset sales start.

Policy makers agreed to halt repurchases of government bonds that mature in the BOE's 895 billion pound ($1.2 trillion) asset purchase program. If the key rate rises to 1%, the bank will consider actively selling more of those assets.

The decision marks a new era for the BOE, reversing the quantitative easing program where the central bank bought government bonds over the past decade to keep a lid on market interest rates. The new plan, dubbed quantitative tightening, may suck billions of pounds out of markets over the next few years.

“We have no real experience on this front,” Bailey said Thursday in an interview with Bloomberg TV. “We're going to have to find our way.”

He said the BOE's balance sheet ultimately will probably end up bigger than it was before the financial crisis but smaller than it is today. 

“We don't have a figure,” he said, adding that policy makers will move depending on the state of the economy and of financial markets. 

He expects any sales to be made at times of relative calm, noting that QE purchases had the biggest impact when there was disorder in markets and much less during more normal times. He doesn't expect much of a ripple from allowing gilts to mature in the asset portfolio and not be replaced by new investments, which will start in March.

“It's very well telegraphed,” Bailey said. “People know what our maturities are. I don't imagine the market effects being very large.”

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