The Bank of England base rate should increase now in order to give the Monetary Policy Committee greater flexibility in the medium term, says MPC member Martin Weale.
In a speech at the Finance Directors’ Strategy Meeting in London today, Weale says the MPC would be better placed to deal with the economy as it evolves if it were to increase the base rate sooner than financial market participants expect.
He says: “If inflationary pressures subsequently prove more severe than the central part of our forecast suggests, then it will be a help to have started to raise interest rates earlier.
“But if they prove less strong then subsequent increases can be slower than would otherwise be the case. Indeed, if the economy is extremely weak, interest rates can be reduced again.”
Weale adds that if the MPC was to raise the base rate now, then interest rates in the future could be lower than currently expected.
He says an early rate rise would reduce speculation that the Bank has departed from its inflation mandate, which would reduce the subsequent risks and may mean that monetary policy does not need to be as tight over the next three years.
Weale maintains the case for an early rate rise despite recent weaker-than-expected economic data, pointing out that the latest hard data from the Office for National Statistics suggests that industrial production declined by less in April than may have been expected given the number of bank holidays.
He also notes there is still a substantial risk that the headline rate of inflation will rise above 5% later this year.
Weale has consistently voted for a hike in the base rate in recent months, but has been unable to win support from the majority of the MPC, with interest rates being kept on hold at 0.5% since March 2009.