Interest rates should be raised modestly to stop inflationary expectations becoming ingrained, according to Martin Weale, a member of Monetary Policy Committee (MPC).
Writing in today’s Guardian, MPC external committee member Weale says the longer inflation stays above target the more likely upward pressure on wages could emerge and that makes a “compelling case” to raise the base rate.
He says: “The longer inflation stays above the target and the further it rises, the greater the risk that inflationary expectations will become built in.
“My concern is that if businesses and pay-bargainers come to regard an inflation rate of three or four per cent as normal, it will become more costly for the MPC to keep inflation close to the government’s 2% target.”
Weale surprised economists when he joined long term monetary policy hawk and fellow MPC external committee member Andrew Sentance in voting for a rate hike in January’s meeting. (article continues below)
The Bank has held the inflation base rate at 0.5% since March 2009.
But Weale adds the committee faces a dilemma in the face of recent poor growth statistics and the effect a rate rise could have on future growth.
He says that reacting immediately to statistics which could be erratic or be revised at a later date could lead to the wrong policy decisions but that waiting too long to act could undermine growth even more severely.
He says: “Each month’s MPC decision needs to be made on its own merits, but the risk of inflationary expectations become ingrained is a substantial one that I will continue to balance against others in the coming months.”