Rates must rise now, says BoE MPC member Ian McCafferty

Ian McCafferty, a Bank of England Monetary Policy Committee (MPC) member, says interest rates should be increased now, because the country’s dwindling spare capacity will be gone by the middle of 2015, which will significantly stoke inflation pressures.

Mr. McCafferty wrote in the Sunday Times that he believes rates are going to have to go up soon anyway, by starting now the process would be more gradual.

In the last three MPC meetings, Mr. McCafferty and Martin Weale were in a minority of 7-2 to increase the 300-year record low benchmark rate of 0.5% to 0.75%. As the majority won the day, rates have not gone up.

In 2009, the Bank of England reduced rates to a historical low of 0.5%. They have not budged since then, even as the economic rebound started gaining pace in the middle of 2013.

With falling inflation, wages growing below the inflation rate for the last five years, and an economy that is starting to show signs of slower growth, most business leaders disagree with the Bank of England hawks.

Ian McCafferty thinks if rates don’t go up now, they’ll be raised more abruptly later.

While acknowledging that the global economy’s outlook is uncertain, Mr. McCafferty emphasized that the UK economy’s spare capacity has been used up “quite rapidly” and will continue shrinking, even if growth slows down during the winter.

He wrote that by the middle of 2015, whatever slack there is now will be mostly gone.

Mr. McCafferty predicts that a pick-up in overall wages is close. He points out that the UK’s unemployment rate fell from 7.7% in the three months to August 2013 to 6% in the same period in 2014.

Falling inflation is not being driven by lower consumer spending, but because of a decline in commodity prices and a strengthening currency, which make imports cheaper, he points out. “In inflation terms, these are one-off effects and, as with the inflation overshoot in 2011-12, there are good reasons to look through their impact, at least partly.”

How many of the other MPC members, which includes BoE governor Mark Carney, the two hawks can win over during the next couple of months remains to be seen.

Although MPC members are supposed to be completely independent of government and other sectors of the economy, they are under enormous pressure from business leaders to keep rates down.

London investors and analysts predict that interest rates will rise in the middle of 2015.

Ian Alexander McCafferty (born 1956) is an economist. Before serving on the BoE’s MPC, he was Chief Economic Adviser to the Confederation of British Industry. He studied at Dulwich College, the University of Durham (Bachelor’s) and the University of Amsterdam (Master’s). Before working at the CBI, he worked at The Economist, Baring Securities, Natwest Markets, the International Chamber of Commerce, and BP.