Britain's 10 million mortgage payers have been warned to ready themselves for dearer borrowing costs after a Bank of England policymaker said stronger-than-expected growth meant the era of ultra-cheap money was drawing to a close.
Ian McCafferty, one of the four external members of Threadneedle Street's monetary policy committee, said on Thursday that the exact timing of a rate rise remained uncertain, but the Bank wanted to ensure that the many borrowers who have become used to more than five years of official interest rates at 0.5% were not taken by surprise.
In an interview with the Guardian, McCafferty said the economy had beaten the Bank's forecasts so far this year and the survey evidence pointed to further robust expansion ahead. "There is momentum in the pace of growth, and it looks like it will continue over the rest of the summer," he said. "Overall, the economy has come a long way in the last 12 to 18 months."
He said the Bank had felt it right to point out the risks that borrowing costs might rise sooner than expected because the City had not responded to the signs that the recovery was continuing to gather pace. "There didn't seem to be any material shift in expectations about what we might do," the MPC member said.
"Were we to have to go early – and that will depend on how the economy performs over the summer and autumn – I think it would have been damaging if it was portrayed as a surprise. It appeared the markets were more certain of the date of lift-off [for rates] than we were."
Up until last week, the City had been preparing for an interest rate rise in early 2015, but comments by the governor, Mark Carney, McCafferty and fellow MPC member Martin Weale have shortened the odds on a move this year.
Sterling climbed to a near six-year high against the US dollar on Thursday as it looked increasingly likely that the UK would take the lead on raising interest rates. The pound rose by a cent as it pushed above the $1.70 mark, reaching levels not seen since October 2008. The CBI warned that the hgher pound could damage exporters.
"The economy has grown a little faster than might have been expected at the beginning of the year," McCafferty said, adding that there were signs that growth in the second and third quarters of 2014 would also beat the Bank's forecasts.
He added that the Bank's forward guidance was intended to prepare businesses and individuals for the first rise in interest rates, particularly given concerns that many households were more vulnerable to increases in the cost of home loans than they had been in the past. "We can't be certain that the economy will be more sensitive to rate rises or a series of rate rises than they were in the past but there are arguments that they will be," he said.
"It is not just that interest rates have been at a low level for such a long period. We have had people with squeezed incomes, and they have used low mortgage payments to offset that."
McCafferty added: "The notion of gradualism is absolutely critical to allow actors to adapt at a pace they find more comfortable than if we were to move at a more rapid rate.
"Even if the date of lift-off is uncertain, people will have an idea how rates will be moving over a longer period."
McCafferty said the MPC wanted to reassure the public that rates would be raised in a way that caused the minimum amount of disruption. He said he would not disagree with the Bank's outgoing deputy governor, Charlie Bean, who has estimated that rates would settle at around 2.5-3%.
While not seeing any immediate inflationary threats, McCafferty said that survey evidence and his own conversations with business leaders suggested that wages might be growing more strongly than shown by the official data. But he said the Bank had not left it too late. "We are only now coming back to the 2008 level of GDP. Unemployment is significantly higher than its medium-term natural level. There is some slack in the economy after a year of solid growth that we can absorb before we have to worry about the inflationary consequences. I have no big worries at the moment."
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