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24 Feb 2015
BOE will have to end ultra-low rate environment – BOE’s Forbes
FXStreet (Mumbai) - In a speech for the Institute of Economic Affairs in London today, Bank of England's (BOE) policymaker Kristin Forbes Forbes stated that the base interest rate should begin to increase at the turn of this year in order to respond to medium-term inflation risks.
Forbes argued that “there are also costs and risks from keeping interest rates at emergency levels for a sustained period, especially as an economy returns to more normal functioning.”
Forbes reiterated, and argued that inflationary pressures today “do not currently appear to be generating a sufficient cost to merit a change in interest rates today.”
Still, Forbes warned that the domestically generated price pressures, danger of asset bubbles, as well as financial instability and limited monetary tools in the future “could factor into a case to tighten monetary policy in the near future.”
Forbes further argued that the current headline Consumer Price Index (CPI) inflation is “not the appropriate way to assess whether interest rates are set appropriately to meet a medium-term inflation target.”
“The primary reasons for low inflation today are external factors that will fade quickly … These factors will restrain headline inflation throughout this year, but then quickly drop out. Even the more lagged effects of sterling’s appreciation will likely peak in the first part of this year and also gradually fade.
Inflation will then, most likely, bounce back,”
“Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon - rather than respond to today’s inflation.”
Forbes argued that “there are also costs and risks from keeping interest rates at emergency levels for a sustained period, especially as an economy returns to more normal functioning.”
Forbes reiterated, and argued that inflationary pressures today “do not currently appear to be generating a sufficient cost to merit a change in interest rates today.”
Still, Forbes warned that the domestically generated price pressures, danger of asset bubbles, as well as financial instability and limited monetary tools in the future “could factor into a case to tighten monetary policy in the near future.”
Forbes further argued that the current headline Consumer Price Index (CPI) inflation is “not the appropriate way to assess whether interest rates are set appropriately to meet a medium-term inflation target.”
“The primary reasons for low inflation today are external factors that will fade quickly … These factors will restrain headline inflation throughout this year, but then quickly drop out. Even the more lagged effects of sterling’s appreciation will likely peak in the first part of this year and also gradually fade.
Inflation will then, most likely, bounce back,”
“Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon - rather than respond to today’s inflation.”