Surging inflation may soon lead to interest rate hike, policymaker warns
The Bank of England may need to hike interest rates soon to stop inflation soaring too high as UK growth continues to confound expectations, a top policymaker has warned.
Kristin Forbes, one of the nine rate-setters on the Bank's Monetary Policy Committee (MPC), signalled she was inching closer to voting for a rate hike after becoming increasingly "uncomfortable" with surging inflation given the economy's resilience since the Brexit vote.
In a speech in Leeds, Ms Forbes said growth had defied gloomy forecasts ahead of the EU referendum last June thanks to a "series of fortunate events" in the second half of 2016, which are set to keep supporting the economy.
She said the UK's impressive performance since last June has made it "increasingly difficult" to justify keeping rates at the record low of 0.25% with inflation predicted to surge close to 3% next year.
She said: "If the real economy remains solid and the pick-up in the nominal data continues, this could soon suggest an increase in b ank rate."
Bank g overnor Mark Carney warned last week that there would be "twists and turns" as Britain leaves the EU , but Ms Forbes said policymakers needed to act soon to ward off the threat of runaway inflation.
She said: "I believe that the MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed throughout this period - even if it means reversing recent adjustments to bank rate."
The Bank voted to keep rates on hold last week at 0.25%, having halved rates in August amid a mammoth economy-boosting package following the Brexit vote.
But the economy has performed far better than feared, with the Bank last week upgrading its forecasts for 2017 and the next two years.
Ms Forbes said even if the Bank did raise rates, the other measures launched last year to boost lending to households and businesses would "still leave a substantial amount of monetary support for the economy".
She added that the Bank's actions last August had provided a far bigger fillip than expected.
Gross domestic product (GDP) grew by 0.6% in the final three months of 2016, meaning expansion has held firm for each of the last three quarters in the face of doom and gloom predictions ahead of the Brexit vote.
Mr Carney controversially warned a Brexit vote could tip the UK into recession, but has since been forced to admit the Bank's forecasts were wide of the mark.
In its quarterly inflation report last week, the Bank upped its growth forecast to 2% this year, 1.6% in 2018 and 1.7% in 2019.
This is up from its November predictions for 1.4% growth in 2017, 1.5% in 2018 and 1.6% in 2019.
Ms Forbes said: "The forecasted sharp deterioration in unemployment and growth in the immediate aftermath of the referendum has not transpired.
"Moreover, other timely data releases do not indicate a sharp deterioration in growth or unemployment is likely to start in the next couple of months."
Her comments highlight the prospect of a growing split among MPC members, with minutes of last week's rates meeting revealing some policymakers were reaching the limit for tolerating above-target inflation.
Ms Forbes said she had not supported the most pessimistic forecasts of the impact of a Brexit vote and believed there was now a risk inflation could rise even more than expected above the 2% target.
The Bank, which has now raised its growth outlook twice in the last three months, said last week around half of its latest upgrade was thanks to the government spending boost revealed in the Chancellor's Autumn Statement.
It added that a solid global economy, surging stock markets and cheap borrowing were also helping support growth.
Ms Forbes said: "Growth may still slow as higher inflation reduces real incomes, or if negative supply effects related to the UK's departure from the EU build over time.
"Signs of such a slowdown starting soon, however, are as yet few and far between."