Why Bank of England hawk Ian McCafferty voted for an interest rate rise

Jessica Morris
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McCafferty expects low inflation to be temporary (Source: Getty)

The Bank of England's (BoE) solitary hawk, Ian McCafferty, has said he voted for an interest rate rise at the September meeting because inflation risks overshooting its short to medium-term target.

McCafferty said inflation is being held down by temporary factors such as sharp falls in oil and commodity prices, and that it should return to 1.25 per cent in a year's time, rising thereafter.

But as the impact of low oil and commodity prices fade - domestic factors such as wages, employment and productivity will become more important determinants of inflation.

"By 2017, growth in domestic costs is expected to be running above average, with inflation held to two per cent only by the drag from import prices," McCafferty wrote in the Times.

Read more: BoE official says interest rates won't be rising anytime soon

"This, to me, is an uncomfortable combination, and the risks around the forecast appear to lie on the upside."

"If we do not act soon, we run the risk of swapping the current period of very low inflation for one in two to three years’ time in which inflation will overshoot our two per cent target more persistently, requiring interest rates to rise more sharply in response."

The BoE's rate-setting committee voted 8-1 to keep interest rates at a record low at their meeting in September.

Earlier today BoE deputy governor Ben Broadbent suggested that he wouldn't be joining McCafferty to vote for a rise in borrowing costs anytime soon.

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