Monetary Policy Committee members have dismissed fears that the public cannot cope with interest rate rises, stating that consumers are taking this into account when they enter new financial contracts such as taking out a mortgage or a loan.
Following recent data from the Office for National Statistics, which revealed that CPI inflation rose in October to 1.3 per cent, experts have predicted that inflation will fall below 1 per cent in the early part of next year and that interest rates will now not rise until the latter part of 2015.
Giving evidence to the Treasury committee on the Bank of England’s November inflation report, MPC member Ian McCafferty said: “Work that we have done suggests that consumers are not more sensitive to changes to interest rates than they have been in previous cycles.
“We are sending measures that while timing of interest rates is uncertain...[we have] signalled that all consumers need to take account when taking out financial contracts for the prospect of slightly higher interest rates over the next couple of years of so.”
He added that when they rise “we do believe there are strong reasons to believe rises will be gradual and over the longer period to see how consumers react to interest rates after a long period at a stable and low level”.
This will protect those that are potentially exposed to higher interest rates, Mr McCafferty added.
Previous data published by YouGov has indicated one in four homeowners will face “difficulties” when interest rates are finally increased from record lows.
Mark Carney, the Bank of England’s governor, told MPs: “Interest rates are likely to go up; it’s a question of timing and degree for when markets move forward. There are some signs in terms of housing behaviour that this message is being increasingly understood.”
When asked by an MP whether inflation will undershoot, Sir Jon Cunliffe, deputy governor for financial stability, said that there were “balanced risks”.
“As likely as not it will drop below 1 per cent in the near future, but then inflation will be pushed back up closer to target over the longer period due to improvement in domestic economy picking up a bit, and by business investment remaining at current levels.”
Kristin Forbes, another MPC member, added that the lack of wage growth is a “severe drag” on inflation and this will be felt through to the beginning of next year, however she emphasised that recent data suggested wage inflation was turning a corner.
Mr Carney said it was likely inflation would fall below 1 per cent, but the domestic measure of inflation would pick up over the forecast period. He also flagged up that the MPC has not had discussions of additional options for additional stimulus.
Mr McCafferty was also asked whether the MPC should be encouraging wage growth, a suggestion which he dismissed, although he is “still concerned” about wage inflation, as this can bring in risks to the Bank’s inflation mandate.
“We need to see this increase, as so far the recovery has been driven by a falling savings ratio and not wage inflation, but I think we will see a pick up in wages and that will, if left unchecked, bring into some risk to our mandate.”
When asked about the global economy, Mr Carney admitted that a culmination of deteriorating conditions and the difficult geo-political situation meant there is a “heightened degree of external risk to the UK”.
Ms Forbes agreed adding that the biggest risks are “external”, stating that she doubts the eurozone will enter a recession again, although growth remains stagnant.
donia.o’loughlin@ft.com