The monetary policy committee (MPC) will keep a close eye on the data over the coming six months, Ian McCafferty told LBC radio yesterday – comments which could indicate a rate rise may happen at the end of 2014 or very early next year.
“It is going to depend critically on how the economy performs over the summer and through the autumn,” the economist said. “We do think that there’s a scope for the economy to grow a little further before we have to start the gradual process of normalisation. That is going to depend on how fast growth is in the second, third and fourth quarters.”
The Bank of England has had trouble explaining when it will raise interest rates as the economy is growing faster than it expected.
Last year the Bank said it would consider hiking rates once unemployment fell below seven per cent. But instead of taking the three years it forecast, that threshold was reached in six months.
Now it wants to raise rates when spare capacity is used up but before inflation rises above two per cent.
This is more complicated as spare capacity is hard to measure – meaning the MPC members have to work harder to explain expectations.