Gertjan Vlieghe, a member of the Bank Of England's monetary policy committee, has revealed why he thinks the base rate might increase in the “coming months.”
His comments are particularly interesting because he did not vote for the base rate to increase at the most recent MPC meeting.
The minutes from that meeting, released yesterday (14 September), showed that seven out of the nine members of the committee, including Dr Vlieghe, voted to keep rates at the present record low level of 0.25 per cent.
The minutes revealed the Bank of England 's MPC is concerned the market is not adequately pricing the possibility of higher rates.
Dr Vlieghe said despite the “clear weakening” of GDP growth in the UK in the first half of the year, employment growth has continued, and wage growth has “not been as weak” as it was earlier in the year.
He said the average private sector pay increase over the past five months has been 3 per cent, and his view is that such wage pressures will contribute to higher inflation and boost economic growth, via higher consumption.
He said: “If these near-term labour market trends continue, I would expect this to lead to somewhat more upward pressure on medium-term inflation.”
The economist said he has been surprised at how durable the levels of personal consumption have been since inflation began to increase, and that there are signs of greater consumption in the third quarter of this year, which would boost economic growth and inflation.
He said the economic backdrop globally has been improving, which boosts demand for UK exports.
Mr Vlieghe said it remains possible that the uncertainty engendered by the UK leaving the European Union could act to slow the economy, but in the absence of any such impact in the coming months, “the appropriate time for a rise in Bank rate might be as early as in the coming months.”
Adrian Lowcock, investment director at Architas, said :”The Bank believe that inflation will peak in October, at around 3 per cent, before falling back.
"As the higher inflation led to a more sluggish UK economy as consumers withheld spending, the Bank of England expect growth to resume once it falls back.
“As such interest rates look set to remain at current low levels for the rest of the year, but the Bank of England did suggest that it wouldn’t take much more growth for them to reconsider further rate rises in the future.”
Michiel De Bruin, head of global rates and money markets at BMO Asset Management, said since the latest Bank of England MPC minutes were released the market has priced in a 65 per cent chance of interest rates rising in November.
david.thorpe@ft.com
