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The Base Rate May Rise Sooner Rather Than Later

11/04/16

A Bank of England rate setter has said the base rate may increase sooner than some expect.

The Bank of England may be set to raise the base rate sooner rather than later, a member of the Monetary Policy Committee (MPC) has said.

Although inflation has plunged to just 0.5 per cent, matching the base level of interest, this situation will change sooner than some think, external MPC member Kristin Forbes said in a speech to the London & Partners dinner.

Ms Forbes said that the common classification of MPC members as 'hawks' or 'doves' over monetary policy is too simplistic, as each member has their own individual views and there are a range of different influences that could steer the economic and financial situation away from the central forecast.

She listed five possible influences as possibly causing such a situation. These include stronger global growth than forecast, led by a better than expected performance in the United States. This alone would push inflation above two per cent by 2017, she said.

Other potential impacts could come from sustained low oil prices, as this would drop out of consideration for the calculation of the Consumer Prices Index rate after a year. Similarly, if sterling appreciates faster than expected this would push inflation lower in the short term and thus make any subsequent bounce-back stronger. She also said assumptions about the labour supply situation may be inaccurate and, on the flip side, UK productivity may improve more than expected.

While it is hard to be sure how the combination of these factors will affect the overall picture, Ms Forbes concluded that some of them "imply an earlier increase in interest rates than currently expected, especially in order to ensure that any subsequent interest rate increases are slow and gradual."

Minutes of the January MPC meeting published last month indicated that there is, at least, no imminent likelihood of a rate rise as all nine members voted to hold the rate at 0.5 per cent.

This contrasts with previous meetings in 2014 in which Ian McCafferty and Martin Weale supported a rate rise, with the pair voting for a 0.25 per cent hike as recently as last month.

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