Outgoing Bank of England policymaker Kristin Forbes has fired a parting shot at the doves on the monetary policy committee (MPC), saying an interest rate hike should not be held back any longer.
In her final speech as an MPC member, delivered this evening at the London Business School, Forbes said: “The ‘lift-off’ of UK interest rates should not be delayed any longer.”
The UK’s “failure to launch” on raising interest rates is no longer justified, in part because of the resilience of the British economy, said Forbes, who leaves the Bank to return to academia next week. She will be replaced by London School of Economics professor Silvana Tenreyro.
Forbes said: “The UK economy appears to be solid enough on key economic criteria, and even ‘overstimulated’ by others, such that a moderate reduction in the substantial amount of monetary stimulus currently being provided makes sense.”
Forbes, a noted hawkish member of the committee, started her tenure in 2014 expecting a series of interest rate rises. Instead, bank rate, the main interest rate charged to other banks, was cut in August last year to 0.25 per cent, amid fears for the UK economy after the Brexit vote.
While she voted in favour of the emergency Brexit interest rate cut, Forbes has since led the way in voting for a reversal.
Since she first broke ranks at the March MPC meeting Forbes has persuaded two of her colleagues to vote for increased rates. A third, the Bank’s chief economist, Andy Haldane, indicated yesterday a rate hike should be imminent, adding to the deep divisions on the MPC.
Inflation has risen above the two per cent target, reaching 2.9 per cent in May. If it breaches three per cent the Bank’s governor, Mark Carney, will be forced to write to the chancellor Philip Hammond, explaining the reasons.
Carney has repeatedly said he will look through rises in inflation caused by the surge in import prices since the currency devaluation. On Tuesday Carney said “now is not the time” for an increase in interest rates.
However, Forbes claimed the effect on inflation would be stronger and longer-lasting than those voting for keeping stimulus in place believe, based on a so-called “trendy” analysis which gives more weight to currency movements.
Forbes argued the depreciation in sterling had reversed the trend for inflation, generating “more persistent inflationary pressures and providing a powerful reason to raise interest rates now”.
Some of the MPC’s reticence has been prompted by wages, which have also failed to launch. However, Forbes dismissed that, saying: “An assessment of domestic inflation should involve measures broader than just wages”.