MPC member Ian McCafferty says market expectations rates could rise in the second quarter of 2015 are 'not unreasonable'
A Bank of England policymaker has reinforced expectations that the first rise in interest rates will come as soon as next spring, in remarks that pushed up the pound.
Ian McCafferty, a member of the monetary policy committee, said that market expectations that the Bank of England will start to raise rates in the second quarter of 2015 are "not unreasonable". He told news agency Reuters in an interview that wage deals in coming months would be "quite critical" as policymakers watch for inflation risks.
Under governor Mark Carney, earlier this month the Bank overhauled its forward guidance policy on when rates would rise from their record low of 0.5%. At the time it said a view in markets that rates could rise in the second quarter of 2015 was consistent with its goal of keeping inflation close to the government-set 2% target. McCafferty told Reuters: "In that sense, you'd have to say that that market curve is not unreasonable.
"The exact timing of course is going to depend on events that have yet to unfold in terms of how the recovery proceeds over the course of the next six to 12 months or so."
Following his remarks being published, the pound rose to session highs against the dollar and euro.
McCafferty, a former chief economic adviser to business group CBI, said he was watching for pressures on inflation from pay deals negotiated in coming months. After years above its target inflation has now fallen below 2%, to stand at 1.9% in January.
"I suppose my view would be if anything, the risk I am watching for, because I think it fits with our mandate, is were we to see inflation risks or inflation behaviour start to develop," he said. "At the moment, that seems to be well under control.
"If we did see some inflationary pressure – more than we currently expect in our central case – that would if anything, I suspect, lead the committee to consider slightly earlier rate rises."
The policymaker said another factor to watch was the strength of the pound, which last week strengthened to a four-year high against the dollar.
"Were it to continue to rise, I would get more worried," McCafferty said, and indicated further strengthening could delay a rate hike.
"It's clearly a consideration in terms of total monetary conditions in the economy so we would need to take it into account when determining what the appropriate monetary stance would be going forward," he said.
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