A key policymaker from the Bank of England’s Monetary Policy Committee, Martin Weale, has stated that waiting too long to increase interest rates could lead to sharper increases in the future, and that if the Bank wanted rates to increase gradually, it should not wait too long to begin increasing them.
Speaking to the Financial Times, Mr Weale said:
“If you want to have baby steps you do have to start sooner. The question is: how close are we getting to ‘soon’?”
However, Mr Weale also remarked that the need to raise rates was not “urgent”.
“We can wait a bit longer. How long that ‘bit longer’ will be I’m not sure, but the best judgment I can have is that it’s not so urgent it needs doing now.
“What I’m increasingly going to have to do … is balance off my sense of the risk of waiting too long versus acting too soon. I very much can see risks both ways.”
The Monetary Policy Committee comprises nine members, including the governor of the Bank of England. It is responsible for setting the official interest rate in the United Kingdom – the Bank of England Base Rate – and also directs other aspects of the government’s monetary policy.
Insider view – what this means for you
In our view, Martin Weale’s comments do not indicate a radical shift in the Bank of England’s forward guidance. They are merely an affirmation of the Bank’s current stance, and of the fact that interest rates are at the forefront of its policymaking.
However, it is our understanding that Mr Weale’s comments will be scrutinised carefully by financial institutions because economists believe that he will be the first member of the Monetary Policy Committee to vote for an increase in interest rates.
The comments, therefore, are likely to have an impact on financial markets. Specifically, the three-month LIBOR (London Interbank Offered Rate) – the rate of interest banks charge to lend money to one another – could be affected, in turn affecting the rates that banks offer to their customers.
The three-month LIBOR has recently started to fall; however, as it is based on where select financial institutions believe the Bank of England base rate might sit in three months’ time, this announcement could well prompt it to rise once again.