The Bank of England’s new Deputy Governor, Nemat Shafik, suggested that higher interest rates may be on the Bank’s agenda soon, telling members of the Treasury Committee that the task of managing a smooth exit from very low interest rates would rank amongst her biggest challenges in her role of Deputy Governor for Markets and Banking.
Ms Shafik was being grilled by the Committee this week about the experience the former development economist at the International Monetary Fund (IMF) will bring to the newly created role, which she starts next month.
In her testimony, Ms Shafik said that the Bank is likely to narrow its estimate of the spare capacity in the economy, which it is now using as a measure for whether to increase the rate of inflation, from a previous range of 1-1.5 per cent of gross domestic product (GDP).
However, she added that it is hard to see a clear picture as, despite the UK’s “striking” economic recovery, the country’s weak productivity was making it harder to gauge the inflationary pressure that would be generated by stronger growth.
One of Ms Shafik’s first jobs will be to lead a “fair and efficient markets review”, which has been demanded by Chancellor George Osborne following the foreign exchange scandal.
She will therefore examine the issues in several major asset classes, specifically in fixed income, currency and commodities, and said that she will allow no collusion between them.
However, Ms Shafik also pointed out that she had not been hired exclusively to focus on monetary policy and that her job would also involve “connecting the dots” between a range of policy areas, meaning that she will sit on the Monetary Policy Committee, the Financial Policy Committee and the Bank’s Prudential Regulation Authority.