Following the comments from Michael Saunders, highlighting that the Bank of England’s (BoE) Monetary Policy Committee (MPC) will need to vote in favour of a rate rise ahead of expectations, a further two members have warned that the central bank is on track to increase rates several times over the next couple of years.
The predictions come despite a global slowdown in trade and the likelihood of falling interest rates in the United States, with BoE deputy governor Ben Broadbent noting that the bank’s health check on the UK economy in early May revealed it warranted higher interest rates than financial markets currently expect.
Broadbent added that there was no reason to alter the bank’s outlook when its MPC, which sets interest rates, meets next week. The deputy governor backed the comments made by Saunders, an external member of the MPC, and BoE chief economist Andy Haldane.
While Saunders reiterated that uncertainty surrounding Brexit was not a reason to postpone rate rises, Haldane noted that the time was nearing for a rate rise to prevent inflation pressure from mounting.
Speaking in front of a parliamentary committee, Broadbent said: “Were the economy to develop in line with our projection ... interest rates would probably have to rise by a little more than what was in the curve at the time of the forecast.”
Addressing MPs, Broadbent added that he was untroubled by the fact that financial market investors disagreed with the bank’s outlook, given the deep uncertainty surrounding Brexit that could change the outlook drastically.
The forecasts from the BoE assume that the UK will leave the European Union with a deal.
However, speaking at the same event in London, another member of the MPC, Gertjan Vlieghe, challenged the comments from Broadbent, stating that the news since May has been “a little disappointing”, with both global downside risks and the domestic downside risks having both “intensified”.
Forecasts from the World Bank predict a slowdown in trade, while a collapse in investment spending will push global GDP growth down to 2.6 per cent in 2019, before increasing marginally to 2.7 per cent in 2020. Investors also anticipate the US Federal Reserve will slash interest rates three times this year in response to a slowdown in the economy.
The comments from Vlieghe are likely to be supported by other MPC members, including BoE governor Mark Carney, and suggest a potential rate rise by the bank at its meeting on 20 June, increasing interest rates from the current 0.75 per cent.
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