The Bank of England should not keep interest rates on hold indefinitely in the face of prospective political uncertainty, one of its rate-setting officials has said, raising the spectre of an increase to the UK’s record low interest rates.
Kristin Forbes, a US academic economist and member of the nine-strong monetary policy committee, said the BoE should be “nimble” as it faced rising inflation and resilient growth in the wake of the Brexit vote.
In a speech in Leeds on Wednesday, Ms Forbes said:
If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate.
An external member of the MPC, Ms Forbes added that any move to tighten monetary conditions would “still leave a substantial amount of monetary support for the economy” after the BoE relaunched its quantitative easing measures back in August.
Sterling edged higher against the euro on the remarks to gain against the single currency on the day.
Last week, the BoE’s rate-setters voted unanimously to keep interest rates at a record low of 0.25 per cent and maintain the pace of its asset purchases.
The BoE also upgraded its growth forecasts and maintained that inflation would overshoot its two per cent target over the next three years after sterling’s post-Brexit slump.
Policymakers said they remained in a neutral stance on rates, which could move in either direction.
Ms Forbes, who in August voted against the resumption of the BoE’s QE programme, said her tolerance for sustained above-target inflation had “recently diminished” with some evidence showing inflation will accelerate slightly faster than the BoE expects.
Ms Forbes added:
There is a chance, however, that these recent upside surprises are a precursor to more evidence that inflation is accelerating faster than expected and will overshoot the 2% target by more than in the MPC’s consensus forecast.
If these trends in both the real and nominal data are solidified, it will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation
But she warned that risks to growth could quickly re-appear as Britain kicks off its Brexit talks in the coming months.
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