British interest rates may rise sooner than many people expect if inflation rebounds strongly after its recent sharp fall, Bank of England rate-setter Kristin Forbes said yesterday.
Monetary Policy Committee member Forbes 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.
“These scenarios, if they occur, would imply an earlier increase in interest rates than expected, especially in order to ensure that any subsequent interest rate increases are slow and gradual,” she said.
The BoE has held interest rates at a record low 0.5% rate since early 2009, and financial markets do not price in an increase until midway through next year.
Economists polled by Reuters forecast a hike around the end of this year.
Oil prices have more than halved since the middle of last year, pushing British inflation to a 14-year low of 0.5% and causing two BoE policymakers earlier this month to drop their calls for higher interest rates.
Forbes said inflation might fall further in the near term, but added that cheap oil and strong growth in the US could boost British consumption, eventually necessitating interest rate hikes.
She also outlined another risk in which the British economy absorbs the impact of sterling’s recent appreciation more quickly than the BoE predicted.
While this would push inflation down strongly in the short-term, “by the end of 2016 it would be higher than in the baseline (scenario) and above the 2% inflation target”, Forbes said.
Some of Forbes’s comments are similar to those of BoE Governor Mark Carney, who said on Friday that it would be best to look through the effects of falling oil prices on inflation.