Differences over interest rate outlook at Bank of England

Last week the central bank signalled it was in no rush to hike rates, with BoE Governor Mark Carney stressing that Britain’s economy would face “twists and turns” during its departure from the European Union.

But Kristin Forbes, an American academic and external member of the Bank’s Monetary Policy Committee (MPC), said she was beginning to grow uncomfortable with the BoE’s policy stance.

Her comments shed light on the partial split among MPC members described in last week’s policy minutes, which recorded that some policymakers had moved “a little closer” to their limits to tolerating high inflation to help support the economy.

Forbes said previous forecasts showing inflation shooting towards 3 per cent had been “just about tolerable” when there was a weak outlook for growth and jobs. But now, she said, there was little sign that the economy was about to worsen.

She also said there was tentative evidence that inflation was starting to pick up faster than expected.

“In my view, if the economy remains solid and the pick-up in the nominal data continues, this could soon suggest an increase in Bank Rate,” Forbes will say in a speech to be delivered in Leeds today.

Her comments caused sterling to strengthen modestly against the US dollar, and British government bond futures dipped.

While Forbes voted to cut interest rates to a record low 0.25 per cent last August in response to the shock June 23 Brexit vote, she and two others on the nine-strong MPC opposed restarting the BoE’s bond purchase stimulus. She also voted against buying corporate debt.

“I don’t think it would surprise many people to see Forbes confirming herself as one of those people with limited tolerance,” said RBC economist Sam Hill, adding that other MPC members had yet to make their personal views explicit. “I don’t think the markets should be swayed by her comments.”

As well as disagreeing about the best path for interest rates, Forbes said an uncertain and potentially volatile economic outlook was not a reason to keep monetary policy on hold indefinitely.

“I believe that the MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed throughout this period - even if it means reversing recent adjustments to Bank Rate,” Forbes said.

Other policymakers have previously said it would be costly to reverse what would be the BoE’s first rate rise since 2007, if it turned out to be unwarranted.

Forbes said Brexit negotiations on how Britain will leave the European Union would probably continue to drive moves in sterling and confidence in the economy.