LONDON (Reuters) - Waiting too long to raise interest rates could damage Britain’s economic recovery and will need to be done “well before” inflation reaches the Bank of England’s 2 percent target, Bank of England policymaker Kristin Forbes said on Sunday.
Writing in the Telegraph, Forbes said increasing rates too soon might make companies less willing to invest and consumers less willing to spend, but the time lag before a change in monetary policy is felt meant there was a risk of leaving it too late.
“Maintaining interest rates at the current low levels during an expansion risks creating distortions,” she wrote in an article for Monday’s paper, published online on Sunday.
“Interest rates will need to be increased well before inflation hits our 2 percent target. Waiting too long would risk undermining the recovery, especially if interest rates then need to be increased faster than the gradual path which we expect.”
Forbes, a U.S. academic and member of the BoE’s rate-setting MPC, said that with inflation around zero, there was no need to act before the Bank was confident it was heading back towards 2 percent within two years as forecast.
She also said China’s yuan devaluation and falling energy and commodity prices meant there was a “bit more time” before inflationary pressures build in Britain, but she would be looking closely for signs of stronger domestic price pressures.
The BoE slashed interest rates to 0.5 percent during the financial crisis in 2009 and has kept them there since.
Investors were taken by surprise earlier this month when the Bank said just one of its nine policymakers - Ian McCafferty -had voted for a rate hike at their August meeting. Most economists in a Reuters poll had expected two or even three members of the Monetary Policy Committee (MPC) to vote for a rate hike.
At its quarterly inflation report update on the same day, the Bank stressed that a recent strengthening of the pound and a renewed fall in oil prices would push down inflation until at least the middle of next year and said the impact of the rise in sterling could persist even longer.
Reporting by Kylie MacLellan, editing by Larry King