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UK interest rates mildly restrictive: BoE's Besley

LONDON - British interest rates are bearing down on the economy but that is justifiable given the inflation outlook, Bank of England policymaker Timothy Besley said in an interview published on Thursday.

‘(Rates) are mildly restrictive, yes. But, given the prospects for inflation, a mildly restrictive rate is justifiable,’ Besley told the Daily Telegraph newspaper.

Besley, who was the only monetary policy committee member to vote to raise interest rates this month, said there was a case to take pre-emptive action to avoid a prolonged period of above-target inflation.

‘We've found in the past that once inflation gets significantly out of control, it's extremely difficult to bring it back,’ he said.

‘More activism in policy now means one can afford to be less active later.’

However, he said policy decisions had been ‘extremely difficult’ given the opposing risks of rising inflation and slowing growth.

‘Speaking for myself, I found it extremely difficult to reach a judgement of the balance of risks around those two factors,’ he said.

At the Bank's policy meeting this month, Besley voted to raise rates to 5.25 percent, David Blanchflower voted to cut rates to 4.75 percent and the remaining seven committee members voted to keep rates on hold at 5 percent.

The Bank's policymakers face an acute dilemma with inflation running at 3.8 percent, almost double the central bank's 2.0 percent target, while the real economy is slowing fast.

There was ample evidence on Thursday pointing up the latter factor: British house prices fell 1.7 percent on the month in July and at the fastest annual rate since at least 1991, the Nationwide building society said, while a GFK/NOP survey showed consumer confidence hit a record low in July as people became increasingly despondent about their personal finances.

Besley was highly critical of any plans to change the government's fiscal rules or the central bank's inflation target.

‘It would seriously undermine the credibility of anti-inflation policy in the UK if at the first time we face tough conditions there is discussion of changing the objective.’