The Bank of England should raise its key interest rate twice in the next two years, according to one of its top economists, but it will likely stay permanently lower than before the global financial crisis.
Ian McCafferty, a member of the rate-setting monetary policy committee (MPC), said: “We would expect to see a couple of modest rate rises over the next couple of years or so.”
McCafferty was one of three members who voted to raise bank rate, the Bank’s key interest rate, from its current historically low levels of 0.25 per cent to 0.5 per cent in June.
Part of the justification for moving rates off their lower bound would be to allow for cuts in the future if demand falters, McCafferty added, in the latest in a flurry of interviews, this one with radio station LBC.
He said: “We would like to get back to a position where we could move rates both ways.”
At its last meeting the MPC voted by five to three to keep interest rates on hold. The three dissenters argued action was needed to tone down inflation, which reached an annual rate of 2.9 per cent in May, well above the Bank’s two per cent target.
The “pick-up in inflation is not something we can just ignore,” McCafferty said.
The economist, formerly chief economic adviser to the Confederation of British Industry (CBI) lobby group, said the healthy performance of businesses in the last year meant the UK economy could cope with higher interest rates. He added the biggest risks to the British economy came from other countries, notably in China.
However, he noted a transitional deal on Brexit will be vital for business.
A transition deal “would clearly be beneficial for the economy", he said. “Businesses do not like sudden change.”