Mark Carney's decision to keep interest rates at their historic 0.5% low could see families and business forced to suffer an interest "shock", a former Bank of England policymaker has warned.
Andrew Sentance, who now serves as senior economic adviser at the audit firm PwC, said that Bank's Monetary Policy Committee has "wasted six months" by pursuing Carney's forward guidance policy on interest rates, which has seen rates stay at their 0.5% low for now five years.
Sentance, who has garnered a reputation as a "hawk" for his consistent call to start raising interest rates, told an audience at a conference organised by the Institute for Economic Affairs think-tank: "The longer they've waited and delayed, the greater the shock will be when they raise interest rates."
An interest rate rise would pile pressure on families, who would see their mortgage payments increase, and business-owners having to pay back bank loans. According to research for Barclays Mortgages, a moderate rise in interest rates by the end of next year would see home owners forced to pay £252 more a year in mortgage payments.
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Carney was forced to to dump the 7% unemployment rate as a marker at which policymakers would start to consider hiking interest rates after the unemployment rate fell just shy of it, replacing it with a "nuanced" assessment of potential slack in the economy.
The governor said that under this new forward guidance, adopted after six months of watching the unemployment rate, would see interest rates not rise for the near term, and only start to do so in a "gradual" manner, only as high as 1.9% by 2016.
However, Sentance, a former MPC member, insisted that Carney and the Bank have got forward guidance 'all wrong' and they should already be "looking for a way out" of the current policy.
Bank policymakers on the MPC are "clinging to an outdated forward guidance when the facts of the economy have changed somewhat", Sentance said.
The economist argued that bank policymakers should "gradually" increase interest rates and should adopt a policy of stressing the "gradualism" as it would combat the risk of an interest rate rise being "sharper and more abrupt".
"They should be trying to explain to the public how they're going to raise interest rates," he said.
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