Monetary Policy Committee (MPC) member Martin Weale has warned that even a 'gradual' interest rate rise could see borrowing costs rise by up to 1% per year, representing a faster rate than markets are expecting.
Weale told the Financial Times that Britain needs to start raising interest rates sooner rather than later if it wants to avoid sharp increases in the future. He also warned that if the MPC wanted the pace to be gradual, it should not wait too long before it starts.With reference to 'gradual', he said a rate rise would involve the bank tightening by 'no more than' 25 basis points a quarter.
'If you want to have baby steps you do have to start sooner,' he told the Financial Times. 'The question is: how close are we getting to "soon"? Of course we can never be sure, but the economy has sustained fairly rapid growth in demand.'
'So I’m having to ask the question – and the answer is less definite than it was six months ago – "where do I think the interest rate should be at the moment?'"
In Weale's view a rate rise isn't necessary right now, but he points out that spare capacity in the economy has shrunk since March, when it was estimated at around 0.9% of GDP.