A senior Bank of England (BoE) policymaker has said the UK should begin raising interest rates now, despite low inflation.
Ian McCafferty is one of just two members of the bank's Monetary Policy Committee (MPC) to have voted in favour of rate hikes since August. The seven other members warned against a “premature” tightening of monetary policy, according to minutes from the BoE's October policy meeting.
They cited inflation pressure at home and an economic slowdown in the eurozone – Britain's most important export market – as reasons to keep interest rates at their current level of 0.5 per cent.
The Bank of England cut interest rates to this record low at the height of the financial crisis in 2009, and has kept them there ever since.
But British inflation is now at a five-year low of 1.2 per cent, which is below the BoE target of two per cent. This led to speculation that McCafferty might change his position on interest rates, but his column in The Sunday Times this morning indicates that he still believes interest rates should be raised.
He predicts “a more moderate pace of growth over the winter” as the economy is hit by the eurozone slowdown, but warns that spare capacity will continue to be used up. If interest rates are kept at their current levels, he explains, the “remaining level of slack is likely to be small, if any remains at all” by the middle of next year.
He adds that a fall in inflation has been driven mainly by lower commodity prices ans a strengthening of the sterling, leading to cheaper imports: “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.
“Starting to raise Bank rate now makes it more likely that the increase required over coming years to deliver our inflation target can be kept gradual and limited.”