17th August 2015
Bank of England policymaker Kristin Forbes has warned that keeping interest rates at their historic low for too long risks derailing the UK’s economic recovery.
Forbes, who is a member of the Bank’s Monetary Policy Committee (MPC), which is responsible for setting interest rates, said that a rise in the cost of borrowing could take one to two years before it has any impact.
Writing in The Telegraph, she said as a result rates would need to rise well in advance of inflation hitting the Bank’s 2% target. She said: “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.
“Maintaining interest rates at the current low levels during an expansion risks creating distortions.”
However the fact that sterling continues to be strong while inflation remains low, allows the Bank more room before it ups the cost of borrowing. Forbes added: “There is no need to act before we are confident that inflation is heading back toward 2% within about two years as expected.”
Interest rates have now been at 0.5% for more than six years after the MPC cut them to their all-time low during the crisis in a bid to prop up the UK economy. At the start of August, the nine-member MPC voted eight to one in favour of keeping rates on hold for now.
Notably Forbes comments arrive a week after her MPC colleague David Miles asserted that there were reasons for beginning “the journey now” towards a rise. Bank of England governor Mark Carney has urged many times already that when rates finally begin to tighten, they will do so at a gradual pace.
Presently the general consensus among economic commentators is that interest rates will rise sometime early next year.
Forbes added: “Unfortunately it is not possible to predict the exact date when it will be appropriate to raise interest rates. The appropriate time will depend critically on when there is more evidence that inflation is heading towards target as forecast.
“Some key indicators that I’ll be watching are domestically generated inflation, core inflation, and the pass-through from sterling’s recent appreciation to prices.”