Warning over low UK interest rates

Kristin Forbes

“Linger too long in the sun and your skin may take on a slightly pink glow”, warned Ms Forbes

Waiting too long to raise interest rates risks undermining the UK’s recovery, Bank of England policymaker Kristin Forbes has warned.

Monetary Policy Committee member Ms Forbes said a rate hike took between one and two years to take full effect.

As a result, rates would need to rise “well before” inflation hit the Bank’s 2% target, she said.

Her comments, in a column in The Telegraph, suggest interest rates could rise sooner than currently expected.

“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 warned.

‘Bit more time’

Ms Forbes, who joined the nine-strong MPC committee responsible for setting interest rates in July last year, said keeping interest rates at their current historic low of 0.5% risks “creating distortions”.

But she said that the pound’s continuing strength, together with recent falls in energy and commodity prices, would keep inflation low for longer, and gave the MPC “a bit more time”.

“There is no need to act before we are confident that inflation is heading back toward 2% within about two years as expected,” she added.

Her comments come less than a week after fellow MPC member David Miles said there were arguments for starting “the journey now” towards a rate hike.

Bank of England governor Mark Carney has said the time for a rate rise is “drawing closer”

Gradual increase

Earlier this month, MPC members voted 8-1 to keep rates on hold – the first time for months the decision has not been unanimous – and this, together with the comments from Mr Miles and Ms Forbes, suggests that the balance is shifting.

Bank of England governor Mark Carney has said that when rates start to rise, they will do so only gradually.

At a news conference last month he said the timing for a Bank rate increase was “drawing closer”, but cannot “be predicted in advance”. The decision would be determined by looking at economic data, he added, including wage growth, productivity and import figures.

Several economists interpreted Mr Carney’s comments, and information in the Bank’s recent Inflation Report, as a signal that any rate rise was likely to be put back from the end of this year until early 2016.

‘Stay vigilant’

Ms Forbes said it was not possible to predict an exact date for an interest rate hike, and that the MPC would first require more evidence that inflation was heading towards its 2% target.

Comparing the risks to the economy to the dangers of sunburn in hot weather, she warned it was important to avoid the temptation to stay outside all day.

“Linger too long in the sun and your skin may take on a slightly pink glow”.

“Enjoy the sunshine and low inflation this holiday season. But remember that neither are likely to persist. Stay vigilant against sunburn,” she wrote.

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