The Bank of England may raise interest rates as early as the second quarter of 2017, says the National Institute of Economic and Social Research, an economic think tank.
According to NIESR, the Bank of England, UK’s central bank, has said that it will only increase interest rates when unemployment drops to seven per cent, which suggests that interest rates will not fall until 2018.
However, NIESR has reported that interest rates will drop much more quickly than the Bank of England originally predicted.
Alan Clarke, a Scotiabank economist, said the Bank of England may have to adjust its forecast by 18 months or more as the UK’s economic recovery strengthens.
Economic growth in the UK increased by 0.8 per cent in the third quarter, which is much more than most economists expected.
In light of such evidence, NIESR believes the central bank could raise interest rates in 2017 in an attempt to keep the economy from overheating.
Although the majority of experts believe the Bank of England is doing the right thing in keeping interest rates low until the economic recovery is in full swing, some say that a 0.25 per cent rate increase should be implemented.
Andrew Sentance, a previous member of the MPC and a PricewaterhouseCoopers economic advisor, is one such person. In fact, Sentance thinks interest rates should be raised by 0.75 per cent in order to reign in the UK’s current loose monetary policy.
While the UK unemployment rate is currently at 7.7 per cent, NIESR director Jonathon Portes said, “There may be a sense that consumer spending and possibly house prices are rising in a way that makes an ultra-loose monetary policy unnecessary.”
NIESR said consumer spending is still driving the UK’s economic recovery, while household savings are being diminished by falling incomes.
The think tank predicts interest rates will be raised ahead of schedule to stop instability caused by low rates, which may be triggered by rising housing costs and consumer spending.
This summer, the money markets abruptly decided that interest rates will have to be raised sooner than the Bank of England predicted. Only weeks into the summer season, the Bank of England began forecasting an initial rise in interest rates an entire year earlier than originally suggested.
In the end, forward guidance does not appear to be overwhelmingly successful as the central bank is preparing its first inflation report since August.