Outgoing Monetary Policy Committee member Ian McCafferty has urged the Bank of England not to “dally” over the next interest rate rise.
In his final speech as a member of the committee at the OMFIF City Lecture in London, McCafferty points to growing inflationary pressures as grounds for acting soon to raise rates.
He says the economic outlook “points to the need for a modest tightening of policy over the course of the next three years, with the rate curve on which the forecast was predicated suggesting three rate rises over that horizon”.
McCafferty says: “That outlook, combined with the risks around it, also suggests that we should not dally in making the next move.
“Under the central forecast, the economy is projected to move into excess demand within two years, while the labour market is already hitting effective full employment.”
“This, combined with the recovery in job turnover across the economy, is now starting to drive wages higher, and the latest settlement news in both private and public sectors suggests that there are now some upside risks to the wage trajectory
in the May central forecast.”
McCafferty says that with energy prices also rising, it is likely that the recent downward in consumer prices index inflation will slow over the course of the rest of this year, which may also have some effect on wage expectations.
He adds: “As a result, there is, for me at least, a significant risk that inflation will still be above our 2 per cent target at the two-year horizon.
“As a result, continuing with the slow reduction in monetary stimulus without undue delay could well prevent the need for a more aggressive tightening later on.”