Britain’s economy is at risk of overheating, starting a new boom and bust cycle, Legal and General economist James Carrick warned today.
He urged the Bank of England to raise interest rates this year and start reining in the housing market, if it wants to avoid another crash in around three years’ time.
Bank governor Mark Carney believes there is enough slack in the economy – and the labour market in particular – to keep rates low for another year or so.
Carney then hopes to raise interest rates before inflation starts rising.
Carrick fears that will be too late – he believes this chart shows the economy has heated up rapidly, using up that spare capacity.
Firms are finding it harder to get the right workers, meaning wages will start rising, pushing up inflation – a sign of overheating.
“Firms are operating at normal levels of capacity, according to the surveys, and if they move above that then we can expect inflationary pressures,” Carrick said.
“The Bank of England should raise rates this year.”
“It is better to poke the UK consumer in the eye and get them to refrain from exuberance, that to wait for house prices to rise and inflation to come back before taking action.”
If the economy grows at around three per cent for each of the next couple of years, the result could be a bust where growth crashes back to below one per cent, he warned.