The Bank of England is prepared to raise interest rates “in the near future” if inflation picks up, one of its senior policymakers has warned.
Kristin Forbes, a member of the Bank’s rate-setting monetary policy committee (MPC), said a rise in borrowing costs would also be necessary should signs of asset bubbles emerge or household debt reaches unhealthy levels.
However, she stressed that none of these factors were yet a cause for concern. “Any could factor into a case to tighten monetary policy in the near future. But they do not currently appear to be generating a sufficient cost to merit a change in interest rates today,” she said.
Speaking at the Institute of Economic Affairs in London, Forbes added that when the time does come for the first rise in interest rates, higher borrowing costs would support the UK’s economic recovery rather than thwart it.
“Gradual increases in interest rates, if they occur in a timely fashion, should not derail the UK recovery, but instead support and strengthen it.”
Interest rates have been held at an all-time low of 0.5% since March 2009.
With UK inflation at a record low of just 0.3% and expected to turn negative in the coming months, the MPC is currently under no pressure to raise rates, despite Britain’s economic recovery.
However, UK inflation is being driven lower by the slump in global oil prices, which have roughly halved since last summer, and the Bank’s governor Mark Carney warned earlier this month that a strong domestic economy would translate into higher UK inflation over the medium term.
“The most likely next move in monetary policy is an increase in interest rates. The message is clear,” Carney said.Forbes said on Tuesday that inflation, asset prices, and household debt were “moderate and manageable today”, but could deteriorate quickly and would therefore require close monitoring.
She said: “The primary reasons for low inflation today are external factors that will fade quickly – primarily the sharp fall in oil and gas prices, as well as declines in food and other commodity prices, and the lagged effects of sterling’s past appreciation.
“These factors will restrain headline inflation throughout this year, but then quickly drop out. Even the more lagged effects of sterling’s appreciation will likely peak in the first part of this year and also gradually fade. Inflation will then most likely bounce back.
“Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon – when all of these effects have diminished – rather than respond to today’s inflation.”
theguardian.com
Kristin Forbes, a member of the Bank’s rate-setting monetary policy committee (MPC), said a rise in borrowing costs would also be necessary should signs of asset bubbles emerge or household debt reaches unhealthy levels.
However, she stressed that none of these factors were yet a cause for concern. “Any could factor into a case to tighten monetary policy in the near future. But they do not currently appear to be generating a sufficient cost to merit a change in interest rates today,” she said.
Speaking at the Institute of Economic Affairs in London, Forbes added that when the time does come for the first rise in interest rates, higher borrowing costs would support the UK’s economic recovery rather than thwart it.
“Gradual increases in interest rates, if they occur in a timely fashion, should not derail the UK recovery, but instead support and strengthen it.”
Interest rates have been held at an all-time low of 0.5% since March 2009.
With UK inflation at a record low of just 0.3% and expected to turn negative in the coming months, the MPC is currently under no pressure to raise rates, despite Britain’s economic recovery.
However, UK inflation is being driven lower by the slump in global oil prices, which have roughly halved since last summer, and the Bank’s governor Mark Carney warned earlier this month that a strong domestic economy would translate into higher UK inflation over the medium term.
“The most likely next move in monetary policy is an increase in interest rates. The message is clear,” Carney said.Forbes said on Tuesday that inflation, asset prices, and household debt were “moderate and manageable today”, but could deteriorate quickly and would therefore require close monitoring.
She said: “The primary reasons for low inflation today are external factors that will fade quickly – primarily the sharp fall in oil and gas prices, as well as declines in food and other commodity prices, and the lagged effects of sterling’s past appreciation.
“These factors will restrain headline inflation throughout this year, but then quickly drop out. Even the more lagged effects of sterling’s appreciation will likely peak in the first part of this year and also gradually fade. Inflation will then most likely bounce back.
“Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon – when all of these effects have diminished – rather than respond to today’s inflation.”
theguardian.com
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