LONDON (Reuters) – British interest rates may rise sooner than many people expect if inflation rebounds strongly from its current decline, a Bank of England rate setter said in an interview published on Monday.
Monetary Policy Committee member Kristin Forbes said inflation might fall further in the near term, but strong growth in the United States and cheap oil could boost British consumption, eventually triggering the need for rate hikes.
“If the risks that I’m focusing on to our last forecasts come through, I think there is a chance that inflation will pick up faster than people had been expecting in the medium term, which then would most likely merit an increase in interest rates sooner than people are currently expecting,” Forbes told the Wall Street Journal.
BoE interest rates have held at a record low 0.5 per cent since early 2009, and financial markets do not price in an increase until midway through next year. Economists polled by Reuters forecast a hike around the end of this year.
Forbes’ comments chime with those of BoE Governor Mark Carney, who said on Friday that it was best to look through the effects of falling oil prices on inflation.
Oil prices have more than halved since the middle of last year, pushing British inflation to a 14-year low of 0.5 per cent and causing two BoE policymakers to drop their calls this month for higher interest rates.
But Carney said rates would need to rise over the course of the next three years, to stop inflation from overshooting the bank’s 2 per cent target.
By contrast, the US Federal Reserve looks on track to hike interest rates much sooner – probably around June, according to a Reuters poll earlier this month – and Forbes said this would have to be watched closely.
“Whenever one large developed country starts to raise rates, that is going to be a wake-up call to investors and markets that at least in some economies the era of very low rates, very cheap credit, is starting to come to an end,” she said.