Martin Weale begins by arguing that the projections presented in the May Inflation Report give a clear message: “...for inflation to be brought back to target interest rates must be expected to rise”. The question is: when? He notes that there is a variety of alternative paths for interest rates that might bring inflation back to the 2% target in the medium term. And he goes on to explain why he thinks that an earlier rise in Bank Rate than currently expected by financial market participants would give the MPC greater flexibility in dealing with the outlook as it evolves. He says: “If inflationary pressures subsequently prove more severe than the central part of our forecast suggests, then it will be a help to have started to raise interest rates earlier. But if they prove less strong then subsequent increases can be slower than would otherwise be the case. Indeed, if the economy is extremely weak, interest rates can be reduced again.” He adds that, were the MPC to raise Bank Rate now, it is possible that interest rates further in the future will be lower than currently expected. What an early rate rise would do, he argues, “...is reduce the speculation that the Bank has departed from its inflation mandate. This itself will reduce the subsequent risks and may, indeed, mean that, averaged over the next three years, monetary policy does not need to be as tight as the current yield curve suggests.”
Published on
13 June 2011
Press release