12th June 2015
The time for an interest rate rise is nearing and the Bank of England will be watching the data closely over the next few months, says Monetary Policy Committee member Ian McCafferty.
Speaking at a conference for economics teachers McCafferty said economic data over the next few months would be crucial to determining when interest rates rise from their historical low of 0.5%, where they have sat for six years.
Markets are already pricing in a 0.25% rise by June 2016 and forecasters are predicting a rise slightly earlier, in Q1 2016.
‘Financial markets expect the MPC to start the process in the summer of summer next year,’ he said. ‘This is, of course, only their current best guess. The performance of the economy over the next year is inherently uncertain, so the timing of the first rate rise will depend critically on the signals contained in the economy data over the coming months.
‘In judging the appropriate time for the first rate rise, we will be watching the economic data, and in particular the signals from the labour market, closely.’
McCafferty said when interest rates do start to rise they will be ‘gradual and limited’.
‘By changing policy gradually the MPC can better judge the effects that it is having,’ he said.
‘A gradual tightening of monetary policy will also better allow businesses, investors and consumers to adapt. To be a little more specific, ‘gradual’ should be understood as more slowly than observed in previous tightening cycles. Prior to the crisis, the average pace of historic tightening, calculated over the period between the first rate rise and the last in the cycle was 0.35% per quarter.’