Bank of England's McCafferty leans against early rate hike

By David Milliken LONDON (Reuters) - Bank of England interest rate-setter Ian McCafferty highlighted a weak outlook for the economy on Tuesday and said he did not know if he would vote to increase borrowing costs at the next meeting of the BoE's policymakers in May. Britain's economy has performed much more strongly than the BoE expected since last June's vote to leave the European Union, faring better than all other major advanced economies bar Germany last year. Earlier this month one BoE policymaker, Kristin Forbes, voted to raise rates due to fast-rising inflation. Minutes of March's policy meeting showed that other unnamed officials were contemplating joining her, and McCafferty had been seen as a likely candidate as both he and Forbes had opposed new bond purchases to stimulate the economy in August. McCafferty appeared to play down speculation that he would back a rate rise in May when he took part in a call-in show on talk radio station LBC. "The straight answer to that, Jamie, is I don't know," McCafferty said in response to a question from a listener. The BoE forecasts that growth will slow during the latter part of this year and into 2018 as households feel the effect of higher inflation triggered by the pound's post-referendum slump against the U.S. dollar, a view McCafferty shares. "We will be raising interest rates and eventually reversing QE (bond purchases) as soon as the economy looks strong enough to bear it," McCafferty said. Asked if the economy was strong enough now, he replied: "I think the economy is strengthening slightly over the course of last year and into the early part of this year. Whether it stays as strong is still very much an open question, because we are seeing inflation starting to pick up." McCafferty said he expected higher inflation to crimp consumer spending and lead to "anaemic" economic growth. Last month the BoE forecast growth of 2 percent this year - little changed from 2016 and at the top end of private-sector forecasts - but a slowdown to 1.6 percent in 2018. Inflation is expected to peak at 2.8 percent next year. A day before Prime Minister Theresa May plans to formally tell the European Union that Britain wants to leave, McCafferty said he would be very surprised if Britain failed to reach an acceptable deal during the upcoming two years of talks. Leaving without a deal - which May said was an outside option if talks broke down - could lead to a couple of years of bad economic performance, McCafferty added. (Additional reporting by Andy Bruce and William Schomberg; Editing by Mark Trevelyan)