IoD Chief Economist warns MPC the longer they wait the harder it will be to normalise interest rates
The Bank of England’s Monetary Policy Committee (MPC) may have voted unanimously to hold interest rates at 0.5% for another month, but the Institute of Directors’ Chief Economist, James Sproule, says the Bank needs to start “normalising” interest rates now.
“Now, more than ever, is the time to start normalising interest rates. Extraordinary low interest rates were justified when our economy was in the doldrums. Now that is no longer the case, the Bank of England needs to reassess its policy. With the UK leading the G7 in terms of growth, and unemployment low and wages rising at their fastest rate since before the crash, our economy is well-placed to start bringing interest rates back to a more normal level.
“Inflation may be hovering around zero, but for monetary policy to be effective, interest rates need to be at a level where they can, if needed, stimulate the economy. Quantitative Easing should not be seen as a substitute for a long term policy on interest rates.
“The longer interest rates languish at a historic low, the harder it will be for Mark Carney to raise them ‘slowly and gradually’. The earlier the process of normalising rates starts, the smoother the course will be, and the longer the economy will have to adjust and prepare. If rates do not begin to return to a more sustainable level soon, the Bank of England will be defenceless when the next crisis strikes, and unable to support the economy by shifts in monetary policy.”