Kristin Forbes, a member of the Bank of England Monetary Policy Committee, signals she may vote for an interest rate hike on the back of recovering UK economy by downplaying potential fallout for UK from emerging markets slowdown…
An interest rate hike in the UK will come “sooner rather than later” and pessimism about the state of the global economy is overdone, according to a Bank of England policymaker.
Kristin Forbes, a member of the bank’s rate-setting monetary policy committee (MPC), was also upbeat about the domestic economy. She argued that the country had only limited exposure to emerging markets such as Russia and Brazil and that, despite signs of a slowdown in those markets, British businesses should not be deterred from building stronger links with them.
Forbes’s intervention, against the backdrop of a recovering UK economy, indicated that she is preparing to vote for rates to be raised from their current record low of 0.5%.
“Despite the doom and gloom sentiment, the news on the international economy has not caused me to adjust my prior expectations that the next move in UK interest rates will be up and that it will occur sooner rather than later,” she said in a speech on Friday.
Forbes conceded that if some of the potential risks to emerging markets play out – such as a sharper than expected slowdown – “then the UK economy is unlikely to be immune”. But she said the UK’s exposure “appears manageable”.
Her comments align her with fellow rate-setter Ian McCafferty, who has voted for higher rates at recent policy meetings, where the MPC has split 8-1 at recent gatherings in favour of holding rates steady. But the Bank’s chief economist, Andy Haldane, said last month that rates may have to be cut further given signs of a slowdown in the UK and risks to the global economy from China.
The newest member of the nine-person MPC, Jan Vlieghe, also left the door open to an interest rate cut this week when questioned by MPs. Highlighting low inflation, Vlieghe told parliament’s Treasury committee that there was an option to cut rates but that the next move was “more likely to be up than down”.
Forbes, a US economics professor, said that on emerging markets, “recent negative headlines merit a closer look”.
“After considering the actual data and differences across countries, the actual news for this group is much more balanced (albeit not all bright),” she said in her speech, entitled “growing your business in the global economy: Not all doom and gloom”.
She was speaking a week after the International Monetary Fund warned central bankers that the world economy risks another crash unless they continue to support growth with low interest rates.
Forbes referred to the IMF’s latest downgrade to global growth prospects but noted that the fund had left its China forecasts unchanged. The data from China “has not yet weakened by anything close to what the gloomy headlines imply”, she added.
More broadly, she felt the global outlook was also better than headlines suggested.
“Although the risks and uncertainties in the global economy have increased, the widespread pessimism is overstated,” Forbes said.
She told business leaders that they should not be deterred from trading with emerging markets by the recent negative news, which “should prove temporary”.
“UK companies – as a whole – have been slow to expand into emerging markets. This may provide some stability over the next few months if the heightened risks in some of these countries become reality. But when viewed over a longer perspective, this limited exposure to emerging markets has caused the UK to miss out on growth opportunities in the past,” Forbes said.
UK interest rates were slashed to shore up the economy during the global financial crisis and they have stayed at a record low for more than six years. With inflation below zero and headwinds from overseas, economists do not expect a rate hike until well into next year.
In the US, interest rates are also at a record low of near-zero. Policymakers had been signalling they could start hiking last month but then worries about China’s downturn prompted them to wait. Still, the Federal Reserve chair, Janet Yellen, recently said the current global weakness will not be “significant” enough to alter the central bank’s plans to raise rates by December.
Forbes was also optimistic that the UK could weather the turmoil and said its domestic-led expansion “shows all signs of continuing, even if at a more moderate pace than in the earlier stages of the recovery.””
Howard Archer, an economist at the consultancy IHS Global Insight, said Forbes’ remarks reinforced the picture of a wide range of views on the rate-setting committee.
“The current wide range of differing views within the MPC highlights just how uncertain the outlook for UK interest rates is – although it still seems to be very much a question of when will the Bank of England start to raise interest rates rather than will they,” he said.
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