Bank of England policymaker warns against interest rate hike
A Bank of England policymaker has warned raising interest rates too soon would be a "serious mistake" amid signs Brexit-fuelled inflation is already hitting consumer spending.
In a speech in London, Monetary Policy Committee (MPC) member Gertjan Vlieghe urged for caution in response to surging inflation, saying a premature rate hike would be more damaging than one that "turns out to be somewhat late".
He said: " The consumer slowdown, which initially did not materialise, now appears to be under way.
"Given the hit to real income from a mix of subdued wage growth and rising inflation, I think the slowdown is more likely to intensify than fade away."
Appearing at Bloomberg's headquarters, he added the cost-pressures of the pound's 12% plunge since the EU referendum would "ultimately fade".
His call for a cautious strategy on rates comes after last month's meeting saw one policymaker vote for a hike in the first split decision since last July.
Eight MPC members voted to keep rates on hold, but mounting concern over surging inflation saw outgoing rate-setter Kristin Forbes vote for a rise to 0.5%.
Despite Ms Forbes' dissent, the Bank is widely expected to keep rates on hold at the record low of 0.25% throughout 2017, with many economists not pencilling in a hike until 2019.
But minutes of the MPC meeting showed other members were also becoming uncomfortable with tolerating higher inflation to support growth and employment ahead of potential economic upset from Brexit negotiations.
Consumer Prices Index inflation hit 2.3% in February, its highest level since September 2013.
Growth has continued to remain surprisingly resilient, standing at 0.7% in the fourth quarter of 2016, though household spending power is expected to be hit as inflation outstrips wage increases.
Mr Vlieghe said retail sales data is showing signs of a slow down , while consumer confidence, car sales and housing indicators have also been on a "gradual downward trajectory" in recent months.
"My interpretation is that households are now responding to the change in real income growth," he said.
He also warned uncertainty around Brexit negotiations could cause a "more material" fall in business spending as the two-year deadline for divorce talks with the EU approaches.
He added: "A cautious strategy on interest rates is warranted, but only for as long as there is slack in the economy and underlying inflation pressures remain subdued."
He stressed he would be alert to signs of wider pressures pushing up inflation or a marked pick-up in spending and borrowing, which would "be my cue that a slightly higher level of Bank Rate is warranted".