UK economy can handle a rise in interest rates

Bank of England’s Kristin Forbes sees case weaken for low interest rates

Kristin Forbes news story-482x271
Delaying a rise in the official UK interest rate is no longer necessary, despite concerns from the Bank of England (BoE) about the nation’s economic recovery. 

Kristin Forbes, an MIT professor and external member of the BoE’s Monetary Policy Committee (MPC), said that the factors for keeping interest rates so low in recent years have become less potent. 

“It is increasingly difficult to make the case that fundamental economic weakness is the main reason why it has been so hard to increase interest rates at all from the emergency levels in the UK,” Forbes said. 

Speaking at London Business School’s ‘Failure to Launch’ event, Forbes argued that the UK could cope with a rise in interest rates after experiencing 2.3% year-on-year economic growth since 2014. 

She added: “GDP growth over the last four quarters has averaged 0.5% (quarter-on-quarter). 

“And although the moderate slowdown that we have been experiencing appears to be in process, the MPC’s latest forecast expects growth to continue to be at or just above trend over the next three years. 

“Unemployment is now 4.6% – the lowest since 1975 – and there is likely little, if any, slack in the labour market.” 

In March 2017, eight of the nine MPC members voted to keep the UK’s interest rate at 0.25%. But Forbes pushed for an increase to counter rising inflation caused by the weakened pound.    

As well as inflation, factors such as Brexit and central banks changing their monetary policies to introduce tighter financial controls have kept the UK’s interest rates down.  

But Forbes believes a more flexible approach to interest rates is needed to cope with economic peaks and troughs. “We should be less hesitant to adjust interest rates – in either direction,” Forbes said. “Engineers are quick to adjust a launch date if there is a technical concern or if the weather shifts. We should do the same.”

Forbes is set to leave the MPC on 30 June.