The Bank of England has signalled it may have to raise interest rates to combat rising inflation in the coming months, according to a member of its Monetary Policy Committee.
In a speech to economists in London, Gertjan Vlieghe, an external member of the MPC, said that “we are approaching the moment” when interest rates may need to rise.
Known for being the most dovish member of the MPC and wary of a rate rise, Vlieghe said he was “struck” by a number of developments in the UK, including employment growth, wage increases and rising inflation.
“Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise,” he said.
“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months,” he added.
The comments come the day after a majority of the nine MPC members said that a hike in interest rates may be necessary in order to curb rising inflation.
Members of the MPC voted by a majority of 7-2 to maintain interest rates at the current record low of 0.25%.
Interest rates were lowered to 0.25% in August 2016 to help boost the economy following the shock Brexit vote. It was the first interest rate cut since 2009 when the financial crisis was at its peak.
Vlieghe said that there was a risk that uncertainty surrounding the Brexit process could have a larger impact on the economy than has been seen so far.
“If that happens, monetary policy would respond appropriately. But for now, it seems the net effect of the many underlying forces acting on the UK economy is that slack is continually being eroded and wage pressure is gently building,” he said.
In July, Vlieghe warned that raising interest rates prematurely could be a bigger mistake for the UK economy than one that turned out to be slightly late.
Economists have suggested that the interest rate could rise could come as early as November.
Howard Archer, chief economic adviser to the EY ITEM Club, said: “These latest comments will increase speculation that the Bank of England could well raise interest rates before the end of 2017, with a move as soon as November very much in play.
“Admittedly, the Bank of England has previously discussed the likelihood of an interest rate hike which didn’t materialise, but there does seem to be a more concerted effort this time around and more unanimity within the MPC of the case for a hike.
“Having said that, an interest rate hike before the end of 2017 remains far from inevitable and much will clearly depend on inflation, growth and labour market developments.”
