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Bank of England official warns of 'sunburn' if interest rates remain low

Published 17/08/2015

Bank of England governor Mark Carney has warned that the time for interest rates to rise is approaching
Bank of England governor Mark Carney has warned that the time for interest rates to rise is approaching

A key Bank of England official has warned of the dangers of "lingering too long in the sun" with low interest rates in the latest sign that it is edging towards a hike.

Kristin Forbes, a member of the Bank's rate-setting Monetary Policy Committee (MPC), said that waiting too long for an increase risked undermining the recovery.

A fall in inflation - expected to have remained at zero in July when official figures are published tomorrow - has eased any pressure for a rates hike.

Ms Forbes, writing in the Daily Telegraph, said it was tempting to put off any increase while enjoying the flat cost of living, higher wages and strong economic growth, but compared this to the dangers of sunbathing.

"Linger too long in the sun and your skin may take on a slightly pink glow," she said. "While you probably won't want to move from your comfortable spot in the sun, if you ignore the warning signs, you may have a painful sunburn that evening."

Inflation remains well below its 2% target but a hike in interest rates would be expected take one to two years to have its maximum impact, Ms Forbes added.

"Maintaining interest rates at the current low levels during an expansion risks creating distortions. Therefore, interest rates will need to be increased well before inflation hits our 2% target.

"Waiting too long would risk undermining the recovery - especially if interest rates then need to be increased faster than the gradual path which we expect."

Ms Forbes said the most recent slumps in oil prices and commodity stocks, plus the strength of the pound and China's devaluation of its currency last week all meant there was "a bit more time before inflationary pressures build in the UK".

"But an extended period of low headline inflation may also obscure growth in underlying cost pressures - a haze which can burn off quickly," she added.

The remarks will be seen as the latest sign to borrowers that they may be hit with a rise in rates over coming months, while savers may start to see a gradual improvement after years of low returns.

They come after Bank governor Mark Carney said earlier this month that the likely timing of a rate hike was "drawing closer" though the Bank dampened expectations that it could come as soon as this year.

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