LONDON (Reuters) - Britain's economy appears to be heading into a self-sustaining recovery, according to the Bank policymaker who had been the most persistent advocate for more stimulus.
David Miles told Reuters that a turnaround in the outlook for Britain was the main reason he dropped his call for more bond buying, rather than any hope that the bank's new interest rate guidance strategy would provide an extra boost.
Miles, a finance professor and member of the BoE's Monetary Policy Committee, also sounded relaxed about the rise in British government bond yields since the Bank launched its new policy of giving guidance on the path of interest rates last month.
"My own interpretation ... is that a lot of those market moves in interest rates and exchange rates are really a response to positive economic news," he said in an interview on Thursday.
Miles's comments on Britain's suddenly more vigorous-looking recovery point towards a broad consensus at the Bank that the economy has reached a decisive turning point after five years of recession and sluggish recovery.
"We may be transitioning to a much more favourable trajectory where optimism becomes self-reinforcing and self-confirming," Miles said. "It is early days ... (but) for me that was the decisive factor to think it was time to keep on hold the stock of assets we had decided to purchase."
"For now, I think staying where we are is the right strategy but we certainly haven't ruled out restarting asset purchases," if the recovery falters, he said.
The central bank forecast last month that Britain's economic growth would pick up to 2.7 percent next year - slightly above its long-run average - from 1.5 percent this year.
Growth so far this year has been unexpectedly strong, with a 0.3 percent expansion in GDP in the first three months of the year followed by 0.7 percent growth in the second quarter, accompanied by positive forward-looking indicators.
Miles played down suggestions that Britain's recovery could be jeopardised by a rise in U.S. market rates once the Federal Reserve starts to wind down its bond-buying, something it opted not to do on Wednesday to the surprise of markets worldwide.
"People shouldn't believe, and I don't think many people do believe, that somehow the position of the UK yield curve is inexorably tied to what happens to the U.S. curve," he said.
RISING YIELDS NOT A WORRY
Miles saw no sign that firms' ability to borrow was being hampered by the sharp rise in British government bond yields since last month, when the BoE committed to keep interest rates steady until unemployment falls to 7 percent. Instead, a better economic outlook was making banks more willing to lend.
"There has been a slow, gradual thawing in credit conditions for medium-sized companies and indeed for some smaller companies as well," he said.
Miles put the rise in bond yields down to signs of stronger growth and expectations among investors that unemployment will fall to 7 percent much more quickly than the BoE's three-year time horizon.
"We will see how that plays out. It may well turn out that the market is right," he said, stressing the difficulty of economic forecasting.
But Miles underscored his view that labour market productivity will rebound strongly as growth picks up, meaning employers will need to hire few extra staff to cope with the upsurge in work.
"Some of the market reaction to our guidance perhaps attached less weight to that link between growth and labour productivity than I think it might have," he said.
Rather than seeking to give a date for a first rate rise, forward guidance was important in stopping the market and the general public believing the bank will raise interest rates as soon as growth returns to its long-run average rate, Miles said.
"If people believe that, it has the potential to knock on the head a recovery that is still somewhat embryonic."
However, Miles played down the idea of the MPC commenting regularly on whether bond yields are in line with its economic expectations, as it did in July. The topic was discussed again in August but was largely absent from September's MPC policy minutes published on Wednesday.
Meanwhile, sterling's strengthening of more than 3 percent on a trade-weighted basis since early August should help push down on inflation, which stands at 2.7 percent, Miles said.
"If that is where we still are ... by the time of the next Inflation Report (in November), that would have some impact on the outlook, particularly for inflation over the next year or so. But some of these movements may turn out to be transitory."
He also said rising house prices were not a worry as the overall national increase of just over 3 percent was little more than the rate of inflation, despite differences around the country.
(This story has been filed again to clarigy in the final paragraph that Miles referred to price differences around the country and not specifically to London)
(Writing by David Milliken Editing by Jeremy Gaunt)