Bank of England rate hike ‘sooner rather than later’

Bank of England policymaker Kristin Forbes said yesterday that a slowdown in China and other emerging markets should not block a long-awaited British interest rate hike, which she said should come “sooner rather than later”.

Forbes, who is seen as a likely early advocate for a Bank of England rate hike, said Britain had limited direct exposure to the problems seen so far in developing nations, even taking into account how they might hit key trading partners such as Germany. Furthermore, Britain’s domestically driven growth would continue, albeit more slowly.

“As a result, despite the doom and gloom sentiment, the news on the international economy has not caused me to adjust my prior expectations that the next move in UK interest rates will be up and that it will occur sooner rather than later,” she said in a speech to business leaders in Brighton.

Forbes said Britain would not be immune to a sharper-than-expected slowdown in emerging economies or a “financial crisis of some type”, but the current wave of widespread pessimism about countries such as China was overstated.

After two years of strong economic growth in Britain, the Bank of England is considering when to raise its benchmark rate from a record low of 0.5%. The bank’s governor, Mark Carney, has said a decision will become clearer around the turn of the year.

Only one of the bank’s nine rate-setters, Ian McCafferty, has voted to raise borrowing costs recently. Most economists still expect the bank to start to raise rates in the first quarter of next year, though a growing number think the central bank could take longer.

Forbes’s view about the low risk of a big hit to Britain from the emerging markets slowdown contrasts with comments from the newest member of the Monetary Policy Committee, Gertjan Vlieghe, who said on Tuesday he considered a global economic slowdown to be “a major risk”.

In her speech on yesterday, Forbes said China’s growth figures might not fully capture the growing clout of its services and consumer sectors, and that the bank might actually have to raise its cautious projections for Chinese growth this year.

She also said Britain’s low exposure to emerging markets would not help the economy in the long run and that Britain could wipe out its trade deficit if its exporters managed to sell as many goods to developing nations as their US peers.

Last week, the bank said it will not necessarily wait for a hike from the US Federal Reserve before it raises interest rates, Governor Mark Carney said on Thursday.

“The exact timing of the Fed move is not decisive for the timing of the move by the Bank of England,” Mark Carney said in a seminar at the annual meeting of the IMF late last week.

Reuters