Photographer: Simon Dawson/Bloomberg

BOE’s Forbes Says U.K. Economy May Soon Need a Rate Increase

  • May become harder to tolerate large inflation overshoot
  • Forbes speaks in text of speech to be delivered Wednesday

Bank of England policy maker Kristin Forbes said if the U.K. economy continues on its current trajectory, accelerating inflation may push her to vote for an interest-rate increase.

Employment and overall output have shown resilience since the Brexit vote, and the acceleration in price growth fueled by the pound’s drop and increasing energy prices means the central bank should be moving toward tighter policy, Forbes said in the text of a speech published Tuesday.

“I am beginning to grow uncomfortable with the trade-off embodied in our current forecast,” she said, referring to the BOE’s balancing of economic growth and inflation concerns. “If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate.”

The BOE kept its key interest rate at a record-low 0.25 percent last week, and the Monetary Policy Committee said policy makers have limited tolerance for inflation above their 2 percent target. Some said they are “closer to those limits,” and Forbes’s comments mark her out as one of those officials growing increasingly concerned about price growth.

Inflation -- at 1.6 percent in December -- is forecast by the BOE to accelerate through this year and peak at 2.8 percent in 2018. 

Wage and price growth could pick up faster than expected, according to Forbes, although uncertainty over Britain’s future relationship with the European Union could make firms reluctant to increase pay, she said. However, monetary policy must be “nimble” and “should not go on hold simply due to heightened uncertainty and volatility,” she said.

“It will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation -- especially when compared to such a small and uncertain softening in growth and unemployment,” Forbes said.

Traders reassessed the likelihood of an increase in interest rates by year end after Forbes’ comments, with swaps indicating they increased the probability to 30 percent from 25 percent.

Forbes also said she disagrees with the MPC’s estimate of the rate that unemployment can fall to without fanning inflation, saying it is likely below 5 percent, but not as low as 4.5 percent estimated by the BOE last week.

Policy makers have faced stark criticism for their so-far overly pessimistic forecasts for the the economy and their August stimulus package. Forbes said while she has “consistently” voiced concerns about the BOE’s forecasts, she had been willing to see how activity developed.

“I have waited, and we now have the hard data,” she said. “The forecasted sharp deterioration in unemployment and growth in the immediate aftermath of the referendum has not transpired.”

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