Bank of England's Ian McCafferty says time for interest rate rise nearing

 
Jessica Morris
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McCafferty says the factors keeping inflation low will fade (Source: Getty)

Bank of England official Ian McCafferty has said the time for an interest rate hike is drawing closer, with the factors keeping a lid on inflation are expected to fade "as we move into next year".

"The economy is starting to return to more normal conditions, after arguably the biggest shock in over a hundred years, and we expect this healing process to continue over the forecast," he said during a speech to economics teachers in London yesterday.

"As a result, the time of the extraordinary policy stance of recent years is gradually drawing to a close."

McCafferty was one of two members of the Monetary Policy Committee (MPC) who had voted for an interest rate hike last year, nevertheless he reversed his stance this year amid tumbling inflation.

However he said that the Bank of England expects inflation to return to around 1.5 per cent by this time next year, and to 1.7 per cent by the end of 2016.

"Although the divergence between the current rate of inflation and our two per cent target is very marked, we calculate that ... the temporary, one-off price level shocks – account for about three quarters of the difference between the current inflation rate and the 2 per cent target," he said.

"The remaining quarter is due to more persistent factors, and in particular the recent weakness of wages."

He also added that the central bank expects inflation will return to its two per cent target by the end of 2017, as slack in the economy is used up.

"In our central forecast, we estimate that the remaining slack of 0.5 per cent of gross domestic product will be absorbed within the next year," he said.

"As this occurs, and as productivity starts to show some recovery, wage growth is expected to pick up, to 4 per cent by the end of 2016."

"This will return inflation to the target by the end of 2017."

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