Interest rates may need to rise “soon” to keep a lid on inflation if the UK economy continues its “remarkably solid and stable” performance, according to a top Bank of England policymaker.
Kristin Forbes will use a speech in Leeds on Wednesday to say signs of an imminent slowdown in the economy are “as yet few and far between” as she describes the UK as a “star performer” relative to other major advanced economies.
Policymakers upgraded their forecasts for growth over the next three years in the Bank’s February Inflation Report and said the unemployment rate was likely to remain below its pre-crisis levels for the rest of the decade.
While officials still expect growth to moderate, Ms Forbes will say “hard data” following June’s Brexit vote show the “forecasted sharp deterioration in unemployment and growth in the immediate aftermath of the referendum has not transpired”.
In a signal that she is close to voting for higher rates, Ms Forbes will add that some data even suggest the pickup in inflation, which is expected to overshoot the Bank’s 2pc target over the next three years, “might be accelerating slightly more rapidly than expected”.
“In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate,” she will say.
The MIT professor will acknowledge that the economic outlook remains highly uncertain and a softening in the real economy could warrant an interest rate cut in the future.
However, she will say that uncertainty alone is not a valid reason to keep interest rates at a record low of 0.25pc, and will call for a “nimble” approach from the Monetary Policy Committee that sets interest rates.
She will say policymakers should be “willing to quickly adjust the appropriate path for monetary policy” depending on how the economy evolves.
Ms Forbes will describe growth of 0.6pc in the previous three quarters as “probably above the economy’s long-term potential”.
“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 – especially when compared to such a small and uncertain softening in growth and unemployment,” she’ll say.
The Bank judged this month that there was more scope for the unemployment rate to fall before inflationary pressures start to emerge. It changed its assessment of the so-called “natural rate” of unemployment to 4.5pc, from a previous estimate of 5pc.
Ms Forbes will say she believes the rate is likely to be “not as low as 4.5pc”, adding: “If true, this would suggest that there is less slack in the economy than in the MPC’s central forecast, and wage growth and inflation could pick up faster than expected.”
Ms Forbes is one of the most hawkish members on the nine member MPC. She voted against expanding the Bank’s stockpile of asset purchases by £60bn to £435bn last August, as well as £10bn of corporate bond purchases.
While the Bank’s Inflation Report signalled last week that policymakers, including Governor Mark Carney, were not in a rush to raise rates, Ms Forbes will suggest that tighter policy was unlikely to have a detrimental impact on the economy.
“Given today’s extremely low level of Bank Rate, and the substantial amount of monetary stimulus that is already in place through a variety of programmes [a rate rise] would still leave a substantial amount of monetary support for the economy.”
H/t reader squodgy:
“Can you believe this shit?
First, ex Goldman Sachs-Rothschild puppet Carney at the BofE tells banks to stop borrowing.
Now one of his puppets warns interest rates will go up to stop inflation.
Lets just think who caused this……the fucking Rothschild owned Bank of England”
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