Households are ready to withstand interest rate hikes because Britain’s buoyant jobs market is boosting wage growth, according to a Bank of England official.
Dr Gertjan Vlieghe, a member of the Bank’s rate-setting Monetary Policy Committee (MPC), said a pick-up in wages and an increase in household debt meant the UK economy was “ready for somewhat higher interest rates”.
Speaking at a Resolution Foundation event in London, he said resurgent global growth was also laying the groundwork for a lift in the cost of borrowing.
He said: “The move from deleveraging to re-leveraging tells me that households are more willing to spend their marginal pound earned, which means debt is now less of a headwind to the economy, then it was previously.
“And that in turn means that the economy is ready for somewhat higher interest rates.
“Of course there are many other things going on in the economy than just moving from deleveraging to re-leveraging.
“First, there is the very significant improvement in the global economic outlook over the past 18 months, which has been unambiguously beneficial for the UK.
“The second is the Brexit-related headwinds to economy, which are pushing in the other direction.
“And the third is the increased evidence that tight labour markets are having some upward effect on wages.”
His comments come after the Bank moved to prepare borrowers for further and faster interest rate hikes last week in response to stronger-than-expected growth from the UK economy.
Bank Governor Mark Carney said on Thursday that rates would need to rise sooner and by more than expected at the time of the Bank’s last forecasts in November to get inflation back to target.
It leaves the door open to a potential rate hike as soon as May, with markets also now pencilling in more than three hikes within three years.
Dr Vlieghe said on Monday that the Bank’s decision on whether to lift rates or not would depend on the performance of the UK economy.
However, the more dovish member of the MPC, who has become increasingly hawkish in recent months, said low interest rates were not to blame for the surging costs within Britain’s housing market.
He said there were economies across the globe who have enforced low interest rates, but do not have the same housing market make-up as the UK.
Policymakers on the nine-strong MPC voted unanimously to leave rates unchanged at 0.5% last week.