The UK’s “star performer” economy could result in a rate rise, according to monetary policy committee member Kristin Forbes.
Forbes says she was among the most optimistic forecasters ahead of the UK’s Brexit vote, but that even she is surprised the economy hasn’t softened more in the seven months since the referendum.
Despite her hawkish tone, Forbes has never voted to increase rates at the 30 MPC meetings she has participated in.
Last week, the Bank of England upgraded its forecasts for growth for the next three years, to 2 per cent this year, 1.6 per cent in 2018 and 1.7 per cent in 2019.
Brexit voters may be partly to thank for unexpectedly positive growth boosting consumer fundamentals as they consider the result of the referendum a boost to their personal situation, Forbes argues.
She raised concerns about holding rates if inflation overshoots 3 per cent, arguing that inflation is picking up faster than expected.
UK inflation jumped to 1.6 per cent in December – higher than the 1.4 per cent consensus forecast.
“If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate.
“It is worth highlighting that an increase in interest rates, however, given today’s extremely low level of Bank Rate, and the substantial amount of monetary stimulus that is already in place through a variety of programs, would still leave a substantial amount of monetary support for the economy.”
GDP growth has been stable at 0.6 per cent each quarter following the vote, Forbes points out, and shows few signs of slowing down.
Year-on-year GDP growth was 2.2 per cent compared to the 1.9 per cent predicted in May. Forbes attributes the outperformance to consumption, which was 0.5 per cent higher than the 2.4 per cent predicted in May.
Policy responses, sterling and the global environment, and less negative effects of uncertainty are the reasons behind the UK’s resilience, Forbes argues.
The primary risks to the UK economy relate to sterling depreciation, including the impact on inflation and wages and how consumers respond to slower real income growth. Other risks include the UK’s new trading relationship with the EU, increased protectionism globally and vulnerabilities in emerging markets.