Bank of England policymaker Kristin Forbes said in a speech that the risks from a return of inflation, asset price bubbles in the financial sector and levels of consumption and savings were “moderate and manageable” at the moment.

Reuters/London


British inflation pressures could pick up quickly and other factors could also mean an interest rate hike is needed “in the near future” but the Bank of England is right to keep rates on hold for now, a BoE policymaker said yesterday.
Kristin Forbes said in a speech that the risks from a return of inflation, asset price bubbles in the financial sector and levels of consumption and savings were “moderate and manageable” at the moment.
“All of these trends merit close attention,” she said. “Any could factor into a case to tighten monetary policy in the near future. But they do not currently appear to be generating a sufficient cost to merit a change in interest rates today.”
The BoE’s nine rate-setters all voted to keep rates at a record low of 0.5% in January and February.
Two policymakers, Martin Weale and Ian McCafferty, had voted to raise rates in late 2014 but changed their minds after oil prices pushed Britain’s inflation rate to near zero.
Investors are pricing in a first rate hike in early 2016.
Sterling hit a 7-year high against the euro after Forbes’s comments but British government bond prices were little changed.
Simon Peck, a gilts strategist at RBS, said Forbes could join Weale and McCafferty, considered the most likely rate-setters to push for a rate hike later this year.
“But it seems there is a relatively strong consensus on the committee for the foreseeable future which is happy to keep policy easy,” Peck said. Forbes said in her speech it might sound silly to ask if rates needed to rise with inflation of just 0.3% in January. However, the external factors which have pushed inflation down — such as the plunge on oil and food prices and the strengthening of sterling — would fade quickly.
She said there were risks that inflation could prove either stronger or weaker than expected: “The bottom line ... is that the current policy of near-zero interest rates does not yet appear to be generating incipient inflationary pressures that could not be addressed in a timely fashion as needed.”
There might also be a need to raise interest rates if capital flowed into Britain because borrowing costs were even lower in other economies, potentially overwhelming the BoE’s toolkit to prevent risks in the financial sector. “At some point monetary policy may have a role to help fill in these ‘cracks’,” she said.
Forbes mentioned other reasons why a rate hike in Britain was not needed now, including signs that consumers were not going on a borrowing binge to fund their spending.


UK should press on with austerity plans, says OECD

The Organisation for Economic Cooperation and Development said yesterday that Britain should continue to cut its budget deficit after May’s national election, and might need to rethink plans to shield healthcare and schools spending.
With May 7 shaping up to be one of the closest and most unpredictable elections in modern British history, all main parties have promised to maintain spending on schools and health. But the Paris-based think tank said this might impose unacceptably high cuts in other areas.
“(Britain should) continue to pursue the medium-term fiscal consolidation path ... and ensure consolidation efforts are fair,” the OECD said in a report.
The opposition Labour party plans to balance the government’s books, excluding investment spending, within the next parliament. The ruling Conservative Party says it intends to balance the budget completely and return a small surplus.
The OECD cited research suggesting that protecting areas such as health and education from spending cuts would imply average spending cuts elsewhere, in real terms, of almost 40% between the financial years 2010-11 and 2019-20.
“Hence, the composition of fiscal adjustment should be reviewed to ease pressure on public services that have already contributed to consolidation,” the OECD report said.
Other think tanks have disagreed with the austere approach of the current government.
Earlier this month, a review of the government’s record by the National Institute of Social and Economic Research concluded that austerity had been an unnecessary risk that had caused significant damage to the economy.
The OECD predicted Britain’s economy would grow 2.6% this year, slightly above the 2.4% forecast by the government’s independent fiscal watchdog, the Office for Budget Responsibility.
But the OECD said Britain needed more private-sector infrastructure spending to deliver the rise in productivity that was necessary to make the economic recovery sustainable.