Waiting too long to raise interest rates could damage the UK’s economic recovery and might need to be done “well before” inflation reaches the Bank of England’s (BOE) 2 percent target, Bank of England policymaker Kristin Forbes said on Sunday.
Writing in the Telegraph, Forbes said increasing rates too soon might make companies less likely to invest and consumers less likely to spend, but the time lag before a change in monetary policy is felt means there is a risk of leaving it too late.
“Maintaining interest rates at the current low levels during an expansion risks creating distortions,” she wrote in an article for yesterday’s paper, published online on Sunday.
“Interest rates will need to be increased well before inflation hits our 2 percent target. Waiting too long would risk undermining the recovery, especially if interest rates then need to be increased faster than the gradual path which we expect,” she wrote.
Forbes, a US academic and member of the Bank of England’s rate-setting Monetary Policy Committee, said that with inflation around zero, there was no need to act before the Bank was confident it was heading back towards 2 percent within two years as forecast.
She also said China’s yuan devaluation and falling energy and commodity prices meant there was a “bit more time” before inflationary pressures build in the UK, but she would be looking closely for signs of stronger domestic price pressures.
The Bank of England slashed interest rates to 0.5 percent during the financial crisis in 2009 and has kept them there since.
Investors were taken by surprise earlier this month when the Bank said just one of its nine policymakers — Ian McCafferty — had voted for a rate hike at their meeting this month. Most economists in a Reuters poll had expected two or even three members of the Monetary Policy Committee to vote for a rate hike.
At its quarterly inflation report update on the same day, the Bank said that a recent strengthening of the pound and a renewed fall in oil prices would push down inflation until at least the middle of next year.
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