Time for Bank of England to start raising interest rates?

The Monetary Policy Committee (MPC) in the UK has suggested that the Bank of England (BoE) should start raising rates soon. Amidst the uncertain outlook for the economy due to Brexit, the consensus view has been that current monetary conditions should be kept in place until 2019. Although a rate rise is not on the cards at present, the BoE acknowledges it is increasingly concerned about a pick-up in inflation, and has not ruled out the possibility of raising rates later this year.

 

Brexit continues to be a huge concern

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This was the first time the possibility of an interest rate rise has been discussed since the vote to leave the EU last June. Mark Carney, Governor of the Bank of England, said on February 2 that interest rates and quantitative easing would be maintained at existing levels. He significantly upgraded the forecast for UK economic growth from 1.4% to 2%. However, he also highlighted the risk of inflation.

With inflation progressing more rapidly than anticipated, Kristin Forbes, an external member of the Bank's Monetary Policy Committee, has expressed her worries over the impact of continued low interest rates. She has pointed out that inflation is now more likely to outpace economic growth and the employment rate than it was before. She has also said that, in light of the new growth forecasts, inflation is very likely to exceed its tolerable limit, and that interest rates should therefore be raised. Ms. Forbes voted in favor of a rate cut last August, but expressed disagreement at the time over any increases in government bond buying.

 

GBP to remain volatile

In a Reuters survey in February, economists said they expected the pound to fall to USD1.21 dollars over the next 12 months. In terms of monetary policy, the UK government does not appear to favor a continuation of low interest rates. Prime Minister Theresa May came close to publicly criticizing the BoE's stance on this in her speech to the Conservative party conference last October.

In response, Carney made his opposition to political intervention on monetary policy very clear. His term of office has been extended for another year, and he will stay on at the Bank of England until June 2019. He continues to warn that Brexit will have a clear impact on the UK economy in due course.

(By ZUU)

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