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MPC member says base rate should rise now

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.

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  • Michael White 14th June 2011 at 10:46 am

    “….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….” I wonder why?

    Agreed that the headline rate is high but if you strip out the effect of direct and indirect taxes, Inc the VAT rise, fuel duty etc the rate is much lower. If you also take out some of the imported effects of raw materials rising in cost then I along with many others, would think core inflation looks a lot closer to the target of 2%?

    How about getting someone on the committee who is not consumed by mathematical theory or even political pressure? Time for a layman to step-up, someone who has the time and is willing to speak from a commonsense perspective…..any chance I could get that call?

  • Tina Greenwood 13th June 2011 at 7:49 pm

    It is totally ridiculous to base your logic for raising rates on hypothetical increases in inflation with the view thast if you get it wrong you can then reduce rates again. This is nonsense. Thankfully the majority of the MPC prefer to wait and see what inflation ACTUALLY DOES and then make an INFORMED decision, based on fact: not some airy-fairy “maybe/possibly” scenario.!