LONDON (Reuters) – The Bank of England should begin raising interest rates now, because spare capacity in Britain’s fast-recovering economy could be used up by the middle of next year, adding to inflation pressures, a Bank policymaker said.
Ian McCafferty, one of two Bank rate-setters to have voted for rate hikes since August, reiterated his view that raising borrowing costs now would help the BoE to nudge up rates only gradually.
Calls for a rate hike might appear odd at a time when British inflation is at a five-year low of 1.2 per cent, well below the BoE’s 2 per cent target, McCafferty said in a column published in The Sunday Times.
He also acknowledged the uncertain outlook for the global economy.
However, the amount of spare capacity in Britain’s economy had been used up “quite rapidly” and was expected to keep on getting smaller, “even with a more moderate pace of growth likely through the winter.
“By the middle of next year, the remaining level of slack is likely to be small, if any remains at all.”
The Bank of England cut interest rates to a record low of 0.5 per cent in early 2009, at the height of the financial crisis, and has kept them there ever since, even as the economy began to recover more strongly in mid-2013.
McCafferty said the fall in Britain’s unemployment rate – which tumbled to 6 per cent in the three months to August, down from 7.7 per cent a year earlier – and other gauges of the labour market showed that “a pick-up in overall wages should be not long in coming.”
He also said the fall in inflation had been driven mostly by lower commodity prices and a strengthening of sterling which makes imports cheaper. “In inflation terms, these are one-off effects and, as with the inflation overshoot in 2011-12, there are good reasons to look through their impact, at least partly.”
McCafferty and another member of the Monetary Policy Committee, Martin Weale, have yet to win over allies among the Bank’s seven other rate-setters for their push to raise rates.