Britain’s economic recovery recently caught up with the United States, partly thanks to record low interest rates.
However, over the last day, prominent Bank of England member Kristin Forbes warned that the central bank desperately has to hike rates soon, or face damaging the progress Britain has made over the last few years.
“An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions,” said Forbes, a member of the 9-strong rate setting Monetary Policy Committee, in a column for the Telegraph newspaper.
“Therefore, interest rates will need to be increased well before inflation hits our 2% target. 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. But with inflation starting from about zero today, there is no need to act before we are confident that inflation is heading back toward 2% within about two years as expected.”
UK interest rates have stayed at a record low of 0.5% since March 2009. This has stimulated the economy because it lowers the cost of borrowing. In other words, it helps those in debt to make repayments and boosts the amount of money in people’s pockets.
The latest data from the Office for National Statistics shows that the UK economy was 2.6% larger in the second quarter (April to June) in 2015, compared to the same quarter a year ago. It also revised up its forecasts for the expansion of the British economy this year.
While the BoE has not hiked rates in over six years and it looks like it will be a while until rates rise again. At the beginning of August, only one member of the Monetary Policy Committee, a BoE panel which determines the setting of rates, voted to increase interest rates to 0.75%. The remaining eight members of the MPC voted to hold the BoE’s benchmark interest rate at 0.5%.
Originally, economists, including the former MPC member Andrew Sentance, forecasted that “two or three members of the committee” would vote for a rate hike. Last month, Bank of England governor Mark Carney revealed that the BoE is looking to raise interest rates “at the turn of this year.”
However, after much speculation, BoE’s deputy governor Ben Broadbent revealed that the central bank will not pre-announce a date for a rise.