Bank of England should not ‘hold back too long’ on raising interest rates, warns MPC member
The Bank of England (BoE) should not “hold back too long” on raising interest rates, warned a member of the Monetary Policy Committee (MPC).
Ian McCafferty is the latest in a string of senior BoE policy makers to strike a more hawkish note.
This view is at odds with Business Secretary Vince Cable who warned on Wednesday that raising rates prematurely could put the recovery “in jeopardy” by choking off business lending.
Mr McCafferty, an external MPC member, said that solving the “productivity puzzle” is “critical” for the timing of decisions on interest rates.
“A fuller understanding of why productivity has remained so weak, and to what extent it is therefore likely to recover, is critical for the path of interest rates as the expansion continues,” he said in a speech on Thursday.
Mr McCafferty added that people would be “hoping for too much” if they expected a more “rapid recovery” in productivity over the next couple of years.
The former chief economic adviser to the Confederation of British Industry (CBI) said that the MPC’s decisions would “depend critically” on data over the next few months.
Standard Life Investments said on Thursday that the time is approaching for the BoE to move away from its emergency policy setting, or risk greater volatility in the future.
James McCann, UK and European economist at the global investment manager, said that the Bank should “flex its muscles sooner rather than later”.
Deriding the Bank’s current policies an “intoxicating mixture”, he advised: “The Bank of England can lead with macroprudential measures in the first instance, but should raise rates later this year if spare capacity continues to shrink and financial conditions do not tighten sufficiently.”
Mr McCafferty is the latest in a string of policy makers to comment on the timing of an interest rates hike, raising the possibility that it will occur later this year.
Martin Weale, a notoriously “hawkish” member of the MPC, said on Wednesday that he expects wages to rise at twice the rate of inflation once the economy has fully recovered.
He predicted that wages would rise by 4pc a year once unemployment and worker productivity return to normal levels, which is double the Bank’s 2pc target for inflation.
Kirsten Forbes, the American economics professor who will join the MPC next month, appeared to be singing from the same hymn sheet as her future colleagues.
She told MPs on the Treasury Select Committee on that a delay in rising interest rates could lead to more abrupt hikes in the future.
Andrew Haldane, another MPC member, highlighted the challenge of estimating “slack” and therefore the timing of an interest rate hike.
The minutes released from the Bank of England’s June 4-5 meeting on interest rates showed that Governor Mark Carney is not alone in considering a hike in interest rates sooner than previously expected.
[Telegraph]