Interest rates could rise sooner than people expect if inflation takes a sudden hike, a top Bank of England policymaker has said.
Kristin Forbes, one of the Bank’s nine rate-setters, said that strong economic growth in the US and falling oil prices could trigger a need for a rise in UK interest rates from the current record low of 0.5 per cent which has been in place since 2009.
Traders have pushed back expectations of interest rates rising from a record low of 0.5% because inflation has come down sharply in recent months. A hike is not priced in until halfway through next year.
But in a speech published Monday, Ms Forbes said: “If the risks that I’m focusing on to our last forecasts come through, I think there is a chance that inflation will pick up faster than people had been expecting in the medium term, which then would most likely merit an increase in interest rates sooner than people are currently expecting.”
Forbes’ remarks follow comments from Bank of England governor Mark Carney last week that prices would start to rise in the next two years to bring the inflation rate back to target.
She said she saw a “higher probability” of scenarios in which inflation falls further in the next few quarters before picking up more strongly than predicted.
In her speech, Forbes listed what she sees as five keys risks: stronger global growth than anticipated by the Bank; oil prices staying lower for longer than forecast; how big an effect a stronger pound has on the economy; faster productivity growth; and whether the Bank has been too optimistic about labour supply.
The Bank will publish its latest forecasts for growth and inflation in mid-February.