Monday, November 30, 2015
A interview with the MPC's Jan Vlieghe
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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A version of this interview appeared in The Sunday Times

In his job as an economist for one of the world’s biggest and most aggressive hedge funds Gertjan “Jan” Vlieghe tried to second-guess what the Bank of England would do.

Now, as a member of the monetary policy committee (MPC), he offers a pretty clear signal to the markets. As far as he is concerned, interest rates in Britain are going nowhere for some time.

In his first newspaper interview since joining the MPC in September, he reveals himself to be firmly in the dovish camp. While some have speculated that a raising of interest rates by America’s Federal Reserve next month could push the MPC into an early hike, he says he is in no rush at all.

For Vlieghe, who has joint British-Belgian nationality, his MPC appointment marked a return to the Bank, having worked there from 1998 to 2005, latterly as Lord (Mervyn) King’s economic assistant. After that he moved into the City with Deutsche Bank and then Brevan Howard, the hedge fund run by Alan Howard, Britain’s wealthiest hedge fund boss, according to the Sunday Times Rich List.

“In financial markets there is more pressure to be fast, to get there first,” Vlieghe said. “But the fundamental questions are the same. The analysis is the same.” What does his analysis tell him now?

People have been puzzled by the weakness of productivity. But it was only a puzzle, he argues, in the context of a normal recession — 2008-9 was not normal. “Once you realised it was a financial crisis, it really wasn’t that surprising,” he says.

As for what is happening now, he thinks productivity growth has picked up to 1%-1.5%, from about 0.5% 18 months ago but it is still weaker than before the crisis, and may stay weaker from some time.

On what will persuade him that it is time to start thinking about higher interest rates, he cites two factors. Growth in the economy, he points out, has slowed over the past 18 months, from about 3% to 2.3% in the third quarter. “We need to see it stabilise, or even pick up a bit,” he says.

The other factor is wages, which he would want to see rising more strongly — perhaps decisively above 3% a year — before pressing the button, “We’ve seen a little bit of disappointment on wage growth,” he says. He would want to see a much clearer “direction of travel” towards higher pay growth.

Underpinning his view on interest rates is a belief that two forces — the debt overhang and demographics — are weighing down on the global economy, which will mean permanently lower interest rates. Even when rates rise, in other words, there will not be that far to go and so: “I am relaxed about waiting a little longer before we start.”

In fact, the longer you talk to Vlieghe, the more reasons he provides for delaying a rate rise. He snorts at suggestions that central banks might want to start to “normalise” interest rates so they have ammunition to fight the next downturn. Such a strategy would “create the slowdown” they worry about.

A hike in rates by the Fed might tell the MPC that the Fed is more confident about America’s economy but if it coincides with further loosening by the European Central Bank, that would tell you that there is compensating weakness in Europe. Sterling’s rise in the past two to three years is also a factor. “We’ve had a huge tightening from the exchange rate,” he says.

And, while stressing that he expects the next move in rates to be up, like the Bank’s chief economist Andy Haldane he is not afraid to talk about the possibility of further cuts, even a negative rate. “If you had asked me five years ago whether the ECB or SNB [Swiss National Bank] would have had negative interest rates, I would have said no,” he says. “You have to think of it in the context of what other people are doing.”

So, if there was what he describes as an “economic disappointment”, would he favour cutting interest rates or more quantitative easing? “Probably rates first,” he says. The wait for a rate hike could be a long one.