The Bank of England is likely to hike interest rates “well into” next year although it could come earlier if the economy rebounds quickly, a policymaker has said.
Gertjan Vlieghe, who is set to leave the Monetary Policy Committee in August, is one of the few BoE officials to speak publicly about interest rate rises.
On Monday, Michael Saunders, another external member of the committee, hinted a rate rise could be 18 months away.
The bank slashed interest rates to 0.1 per cent at the start of the pandemic last year and there had been speculation the central bank could introduced negative rates.
Earlier this month the MPC left its stimulus programme unchanged and unanimously voted to keep interest rates at their current levels.
It said the outlook for the economy remains uncertain but it is experiencing a “temporary period of strong GDP growth and a temporary period of modestly above-target CPI inflation”.
In the monthly report today, it said the economy is expected to expand 7.25 per cent in 2021, marking the strongest growth since records began in 1949.
Vlieghe said he broadly agreed with the forecasts but added he thought spare capacity created by the pandemic in the economy would prove harder to use up.
“In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with some modest further tightening thereafter.” Vlieghe noted that given the furlough scheme is not due to expire until the end of September, the health of the economy cannot be properly assessed until early 2022.
If unemployment in the first quarter of this year was low and upward pressure on wages stronger then than the BoE expected, “a rise in Bank Rate could be appropriate soon after, along a slightly steeper path than in my central case,” he said.
If concerns about the Covid variant continue pushing unemployment higher, the BoE may have to offer additional stimulus.