The Bank of England's new deputy governor has signalled that an interest rate rise is edging closer after telling MPs the amount of spare capacity in the economy is lower than the Bank predicted in May.
Nemat Shafik said the Bank was likely to revise down its estimate that spare capacity in the UK economy is equivalent to 1% to 1.5% of GDP in its August update. This would be a sign that the time for an interest rate rise is moving closer.
Commenting at a Treasury select committee hearing on her appointment, Shafik said: "I think the next time those estimates are made it will probably be lower because we've seen that both output and employment have improved far better than anyone had expected and spare capacitcy in firms seems to have closed." The Bank previously indicated that the time to raise rates from the all-time low of 0.5% will be before unused capacity reaches zero.
Shafik will join the Bank on 1 August as the deputy governor for markets and banking. She will become only the second female deputy governor of the Bank.
Shafik told the TSC that one of the main risks to financial stability in the UK was rising house prices and their impact on household debt.
"Household debt in the UK and elsewhere did not adjust downwards as sharply during the recent crisis as in previous recessions, and hence remains relatively high by historical standards.
"Rising house prices tend to exacerbate that trend. Households with high levels of borrowing may at some point find themselves facing repayment difficulties, leading to sharp adjustments in spending, which if large enough could have implications for financial stability and for the economy."
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