Thursday 27 May 2021 4:44 pm

MPC member: Smooth furlough transition could see earlier rate rise

An interest rate rise could be necessary in the first part of next year if the UK’s transition out of the furlough scheme does not come with a hike in unemployment, a Monetary Policy Committee member said today.

Dr. Gertjan Vlieghe said that he expected an interest rate rise to become appropriate “only well into next year” in a speech in Bath today.

But he suggested if “the unemployment rate (is) at or a little below current levels by the end of the year, with associated signs of upward inflation and wage pressure beyond the temporary and base effects, then a somewhat earlier rise in the Bank Rate would be appropriate.”

Read more: Furlough and unemployment will keep inflation figures down and give Rishi Sunak breathing room

Economists are split on whether the huge amounts of money pumped in by central banks through the course of the Covid-19 pandemic will see inflation spike.

Andrew Bailey, the Bank of England governor, expects inflation to increase in the second half of this year but that any rise above the Bank’s 2 per cent target will be temporary.

His chief economist Andy Haldane, soon to depart for the Royal Society of Arts, is known to be more wary of an extended period of higher inflation.

Vlieghe said a rate rise would be most likely in the first quarter of next year if unemployment does not increase significantly once the furlough scheme begins to be wound in.

Some 4.7m people were still on furlough of some kind at the end of February, though that is believed to have fallen with the reopening of hospitality venues.

Read more: Analysts warn of post-furlough job cuts wave and oldest will struggle most