POLITICS

UK Interest Rate Rise 'Likely' Next Spring, Warns Bank Of England's Weale

20/02/2014 15:47 GMT | Updated 20/02/2014 15:59 GMT
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A newspaper board features news concerning the announcement by the Bank of England of a cut in interest rates from 4.75\% to 4.5\%, as a man walks out of the Bank of England in the City of London, Thursday August 4, 2005. The Bank of England's move to reduce its base rate to 4.5\% was also welcomed by industry leaders, following the UK economy's worst growth rate in 12 years. See PA Story ECONOMY Rates. PRESS ASSOCIATION Photo. Photo credit should read: Johnny Green/PA

Interest rates are "most likely" to rise as soon as spring next year, in a move that would potentially hit families and small businesses as the cost of borrowing soars, a Bank of England policymaker has warned.

Martin Weale, member of the Bank of England's nine-strong Monetary Policy Committee (MPC), predicted that the rate rise from its 0.5% historic low could come before the 2015 general election.

He told Sky News: "I think it is very helpful if we try and explain that the most likely path for interest rates is that the first rise will come perhaps in the spring of next year. And then the path is likely to be relatively gradual."

Weale suggested that interest rates could rise sooner if Britons' pay packets start to rise more quickly than predicted, with them set to stop being eaten into by inflation in the second half of this year.

The Bank of England last August promised to not even consider increasing borrowing costs until the unemployment rate hit a 7% threshold under their "forward guidance' plan.

The unemployment rate's sharp drop, which defied even the Bank's expectation, as it hit 7.1% last November, forced governor Mark Carney to ditch the 7% threshold as a marker in favour of assessing the need for interest rates rises on the robustness of the economy.

Carney insisted a more "nuanced" form of interest rate policy was needed, rather than a single threshold used by the Bank for six months that it described as "well understood".

However, Weale suggested that the Bank may have overestimated the amount of spare capacity in the economy, at 1 to 1.5% of GDP, marking the extent to which an economy can grow without forcing policymakers to hike interest rates to keep inflation under control.

But another Monetary Policy committee member David Miles argued two days ago that it was "possible' that there was more spare capacity than the Bank of England calculated, suggesting a split among Bank officials.

“There’s a range of views”, Miles told Bloomberg. “One shouldn’t get the impression that everyone on the committee is absolutely convinced it must be in that interval. That was just the central estimate, if you will, of the committee.”