Solitary Bank of England dissenter Ian McCafferty has said a recovery in lending justifies an interest rate hike coming sooner rather later, especially if rates are to go up only gradually in future.
McCaffery who was the only member of the Bank’s nine-strong monetary policy committee to vote for a hike at the beginning of the month, said a reduction of the headwinds in business finance is now supporting the normalisation of the economy.
It is reasonable to expect the neutral interest rate – the level of interest rates consistent with full employment and inflation at target – to also move towards more normal levels.
If we on the MPC are to achieve our ambition of raising rates only gradually, so as to minimise the disruption to households and businesses of a normalisation of policy after a long period in which interest rates have been at historic lows, we need to avoid getting ‘behind the curve’ with respect to the neutral rate. And for me, that provides an additional justification not to leave the start date for lift off too late.
McCafferty also said that alternative financing – such as peer-to-peer lending and crowdfunding – for small and medium-sized enterprises was a growing market, but was still tiny compared with bank lending.
Annual growth in lending to the private sector rose at 2.3 per cent year-on-year in August (according to the Bank of England’s M4 lending excluding intermediate other financial corporations) and has only failed to grow above two per cent in one month this year. This compares with other post-financial crisis years where credit growth failed to climb above two per cent in any month.