17 08 2015

Bank of England's Kristin Forbes warns of risks in keeping rates low for too long

Bank of England's monetary policy committee member Kristin Forbes has warned that the UK's economic recovery could be undermined if the central bank waits too long to raise interest rates.

In her column in The Telegraph, Forbes, who is part of the nine-member committee tasked with setting interest rates, suggested that interest rates could rise sooner than currently expected.

"Waiting too long would risk undermining the recovery - especially if interest rates then need to be increased faster than the gradual path which we expect," she said.
Given that a rate hike took between one and two years to take full effect, interest rates need to rise "well before" inflation hit the central bank's 2% target, she said, warning that "maintaining interest rates at the current levels during an expansion risks creating distortions.
Forbes pointed out that the UK economy has grown by 0.7% in the second quarter, which was its "long-run average before the financial crisis", and that it has been at this rate for five of the last six quarters and is expected to remain at these levels for at least the next year.
"The UK was the fastest growing economy in the G7 in 2014, and is expected to be one of the two fastest growing economies in 2015 (along with the US)," she added. She also noted that real spending power has increased at its fastest pace over the last months than has occurred since 2007.
"The underlying rate of wage growth may be even stronger, as more new hires have been in lower paying sectors and for workers with less experience and qualifications - groups that have had the greatest challenge finding employment."
She noted that the BoE estimates that this "composition effect" may have caused underlying wage momentum to be understated by up to 1% recently and these could also be reducing measured productivity growth.
The Consumer Price Index due on 18 August is likely to confirm that inflation has continued to hover around zero. She said that while there is "no need to act before we are confident that inflation is heading back toward 2% within about two years as expected," an extended period of low headline inflation may also obscure growth in underlying cost pressures.
She said key indicators that she will be watching for evidence that inflation is heading towards the 2% target include: domestically generated inflation, core inflation and the pass-through from sterling's recent appreciation to prices.
Kristin Forbes, who is professor of management and global economics at the MIT Sloan School of Management has been a member of the MPC since July 2014.
The BBC noted that for the first time in months, the MPC decision to keep interest rates on hold was not unanimous, and together with comments from another committee member David Miles and Forbes, there are suggestions that "the balance is shifting."
Earlier this month, MPC members voted 8-1 to keep rates on hold and last week, Miles said that there were arguments to start the journey towards a rate hike.