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Fed hike gives Bank of England room to act

16 Dec 2015

The Institute of Directors has welcomed the US Federal Reserve’s decision to raise interest rates, and called on the Bank of England to see through this temporary period of low inflation and begin normalising rates in the UK.

James Sproule, Chief Economist at the Institute of Directors said:

“The Federal Reserve’s decision to start normalising interest rates is a welcome sign of the central bank’s confidence in the US economy. For Britain, higher US interest rates give the Bank of England the flexibility to start normalising rates on this side of the Atlantic as well. Since the Fed has acted first, it diminishes the possibility of an increase in UK interest rates upsetting the value of the pound against the dollar – just one more obstacle which could have worried the Bank.

“While inflation is clearly way off the Bank’s 2% target, the Monetary Policy Committee must look past this temporary period of low inflation and act soon. Interest rates still need to be normalised, not to tame rising prices but to take away monetary stimulus which has done its job to spur growth, is no longer needed and could be leading to capital misallocation.

“There will always be a thousand possible excuses not to raise rates, but we must take account of the exceptional circumstances in which we find ourselves. We are probably close to peak employment in the UK, with employment growth set to plateau next year. All these factors should encourage rate-setters in the UK to think seriously about raising rates in early 2016.”

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