IoD Warn Bank of England Against Delaying First Interest Rate Rise

The Institute of Directors (IoD) has urged the Bank of England to commence raising interest rates.

The call - an unusual one from a leading business body which typically advocate for lower rates for longer - comes as the Bank released its minutes from the July meeting.

It was shown that no members of the committee are yet inclined to raise interest rates with concerns over developments in Greece certainly having weighed.

The dovish tone of the mid-2015 has however earned a strong response from the Institute of Directors (IoD) who believe a smoother path of interest rate rises requires action to be taken now.

The IoD’s Chief Economist, James Sproule, says:

“Now, more than ever, is the time to start normalising interest rates. Extraordinary low interest rates were justified when our economy was in the doldrums.

“Now that is no longer the case, the Bank of England needs to reassess its policy. With the UK leading the G7 in terms of growth, and unemployment low and wages rising at their fastest rate since before the crash, our economy is well-placed to start bringing interest rates back to a more normal level.”

The IoD is concerned that should interest rates languish at their historic lows it will be harder for Mark Carney to raise them ‘slowly and gradually’.

“The earlier the process of normalising rates starts, the smoother the course will be, and the longer the economy will have to adjust and prepare. If rates do not begin to return to a more sustainable level soon, the Bank of England will be defenceless when the next crisis strikes, and unable to support the economy by shifts in monetary policy,” says Sproule.

Markets are broadly pricing in the first interest rate to come in February/March 2016, in line with Mark Carney’s warning that a rate hike could occur at the turn of the year.

Weale and Mcafferty, who remain the keenest hawks on the MPC, could well shift in favour of a tightening cycle within the next few meetings.

Kirsten Forbes could well join them particularly now that Greek related risks have started to subside.

Chances of a 2015 rate increase remain distant but not an impossibility.

With regards to the impact of the Minutes on the pound we see the reaction has largely been positive despite what we regard to be a marked attempt by the MPC to talk the value of sterling lower.